Spring is in the air! I hope you and your family are having a great start to 2017! Our team looks forward to catching up soon. We have several educational events on the calendar. Stay tuned for more information!
In the first quarter of every year, I like to give clients a short recap of the previous year and update you on what we’re currently working on. We feel that it’s important to communicate many of the core concepts and strategies that we use in both rising and declining markets. Please read the below information, which I categorized into two sections:
Section I: Looking Back — A Review of MWA’s 2016 Performance
Section II: Looking Forward — Portfolio Design for 2017
Section I: Looking Back — A Review of MWA’s 2016 Performance
In the link HERE, you will find asset class information that makes up your investments.
First, I want to point out that our portfolios had a strong year of performance fueled by a run-up in small US companies. The value and size premiums to which we tilt our portfolios have come roaring back, and these results helped lift our quarterly returns. Large cap value outperformed large cap growth 17% to 7%, and small cap value outperformed small cap growth 31% to 11%.
At the end of year, the Trump rally really raised the dollar, which slightly reversed/moved the returns of overseas investments — one of the leading asset groups going into the election. So far in first quarter, these areas are again some of the top performers. For 2016, international developed markets remained challenged with positive growth at 2.7%. Small caps outperformed large caps, and the value effect was positive. Emerging markets underperformed the US but with a positive 11% return (down from 20% after the election as the rapid rise in the US reduced dollar-weighted returns).
We feel strongly that international diversification is both prudent and necessary. We are very pleased with our portfolios for 2016. Our standard models outperformed the Vanguard models we’ve been checking against for the year and the fourth quarter.
Lessons to Remember
2016 taught us several important lessons about markets — primarily that markets work and they work quickly. Many companies often waste much effort trying to guess or predict shortterm movements when the key to winning is having a strategy you believe in — one that works in the long run and aligns with your tolerance for risk. Markets are unpredictable in the short term, so my advice is to resist the urge to quickly outsmart markets and accept that timing only accounts for about 2% of total returns. In short, it is better to be in markets than out of them. Over the years, we have seen this strategy provide the best results for our clients. Here are a few key points we want to make you aware of:
2016 reminded us that markets can stay wrong longer than investors can stay liquid. Many people thought that rates would rise once the US government stopped its bond-buying program, yet as the US stopped buying, rates actually turned negative in many parts of Europe, a phenomenon rarely seen in financial markets.
2016 also taught us that markets are efficient and impossible to accurately time. As the election news swung from a Clinton defeat to a Trump win and a Republican sweep of Congress and the Senate, US markets skyrocketed as they swiftly repriced possible economic outcomes. I think this example shows the speed and efficiency of financial markets as a pricing mechanism. Always remember that markets are forward-looking instruments.
Here is a great blog post on why avoiding market timing might be wise: http://theirrelevantinvestor.com/2016/11/27/mentalscartissue/
Section II: Looking Forward – Portfolio Design Considerations for 2017
As advisors, we are frequently asked for our forecasted predictions, and “gurus” offer opinions, guesses, and predictions like they are facts.
What are our predictions or forecast for 2017? Answer: Who knows!
I recently read that to beat a low-cost index fund, a portfolio manager using an investment approach based on “predictions” would have to be right 67% of the time to overcome the costs that accompany frequent buying and selling. Rarely can investors post these types of returns for an extended period of time. Even if they could, there would be no way to determine if they were “right” because of skill or luck.
Through MWA’s relationship with Dimensional Fund Advisors, clients have access to some of the best investment tools available in the marketplace. The methodology we primarily use has received many press accolades because of DFA’s longterm performance, client stewardship, and disciplined process.
2017 Investment Strategy:
I want to advise our clients to make sure they always balance both risk and return. It is crucial that you maintain both offense and defense in your portfolio. We believe the exact percentage changes based on a variety of factors, such as confidence, liquidity, and job security. We have not had a bear market for a long time, and while I don’t know when the next one is coming, I do know we are due for a visit (probably when we least expect it). You need to have enough defense so that when the markets eventually fall, you see the pullback as an opportunity to redeploy cash, not as a longterm loss. It is in the hard times that stocks are returned to their rightful owners — those who patiently buy and hold rather than trade and speculate. Further, more wealth is created in meltdowns; it is merely not realized until markets rebound.
If your portfolio needs a little more defense, please give us a call and we will be happy to discuss options or tradeoffs. US valuations are in the top 5% of prior periods, so interest rates and valuations will pose headwinds for US portfolio. Remember, valuations in markets around the world are much cheaper than in the US, and you own those areas, as well. Your portfolios hold nearly 12,000 positions spread across 6 continents and more than 40 countries.
Safety comes from diversification, and we at MWA practice extreme diversification. l don’t know what the future holds, but I will leave you with this. I looked at the worst 20 year return for a portfolio of 50% stocks and 50% bonds that owned DFA funds and prudently rebalanced each year. The lowest 20 year return — the worst rolling 20 year period on record — was right at 6% per year. Could our future be different? Yes, it could, but history has a way of repeating itself. Your costs are low, they are diversified, and we are using the best tools available. The rest will take care of itself.
Please know that the key to getting the best advice from our team is regular meetings or video conferences, which keep us in the loop with your evolving situation and allow us to give you personalized advice. If you want us to review your plan or create a retirement plan proposal for your business to further defer taxes, please let us know. We have a great 401k plan option.
To receive the current version of our disclosure brochure, please contact our firm at 817-416-7300 or via email at firstname.lastname@example.org. You may also find additional information on our website: www.millswealthadvisors.com.
Thank you for being our client and trusting us to manage your money. Best wishes for a healthy and prosperous 2017.