One year ago my wife and I (Tim) were fed up with the dreary winter and decided to put a sunny vacation on the calendar. We settled on the island of Oahu to enjoy the beaches and give me a chance to visit Pearl Harbor. After an endless 300+ day countdown we finally took the family on the trip last month. We had an absolutely incredible time, except for one little hiccup. Five days into our trip, eleven stories up in the Hale Koa Hotel, we got an alert on our phones – BALLISTIC MISSILE THREAT INBOUND…!! (See the screenshot of my wife’s phone below.)
As I tried to evaluate where the safest place to handle a nuclear missile would be, I came to the conclusion there’s probably no safe place (or at least very few) on such a small island. So instead, we pulled up some national news outlets, but there was no mention of the threat. Not one word.
Five stressful minutes later I found one random person on Twitter who said it was an error, and then 38 more stressful minutes later it was confirmed …False Alarm. Thank God!
The alert was a mistake, but it got my wife and I talking about what we should do in a real event. I still don’t know exactly what I should do with an inbound ballistic missile threat, but investment threats I’m much more comfortable with.
New Threat
In just the last few days we’ve seen a significant threat to the stock market. Higher interest rates, which slow the economy, were initially to blame for a wild few days, and then programmed trading and frazzled nerves seemed to make it worse. Stocks on Monday, Feb 5th logged the 99th worst day for the stock market ever in percentage terms (Wall Street Jounal), down 4%. The DOW is now down 7.5% from its high it notched just a week ago. Is this the end of the long up (or bull) market or just another false alarm?
If we look into the details, we are now in the fifth longest bull market in history (according to the First Trust chart below), which will turn nine years old March 9th. It turns out the average bull market is nine years old, so if we’re not at the end we’re at least getting close. This is likely making some investors nervous. Could the economy actually continue to grow with the tax reform that was passed last year? Or will the long anticipated rise in interest rates and political discord finally bring the good years to an end?
We, of course, have no way of knowing. Actually I can make the case for both the market falling and growing. Instead, we try to prepare clients for any economic situation using the British Army adage: Prior Proper Planning Prevents Pretty* Poor Performance (* a mild expletive was replaced to protect the innocent).
As we start the year, our proper planning includes looking backwards to see what we can do differently to improve our product and our process. In 2018 we believe one way we can do that is by spreading out into a more diversified group of products.
Moderate Portfolio
Some clients have already begun to do this. Our moderate (or medium) risk takers have little exposure to growth to keep volatility low. However, lower risk means lower returns as well. To help with that, we’ve been adding growth stocks to some of our client’s accounts who’ve expressed the desire to take on more risk and participate with the stock market. For those that don’t want to increase their risk level, we can now offset the additional risk by adding a guaranteed 3% option in the portfolio, thanks to rising interest rates.
A simplified version of our new Moderate Portfolio would look something like the pie chart shown. This will allow moderate risk takers to benefit from growth and be protected at the same time, while leaving most of the account in the consistent dividend-paying stocks that have done well over the long run.
Growth Portfolio
Matthew Coffina, CFA at Morningstar, the predominant mind behind the Growth Portfolio, has done a great job keeping up and actually surpassing the stock market’s growth. Between him, Motley Fool, and a few other experts’ analysis, the more aggressive portfolio has been in good shape. The only changes we intend to make this year is to have cash ready to continue to buy if/when the pull back continues.
Conclusion
The most important thing we can do is be prepared emotionally for an eventual bad year. We thought we were due for one the last few years, but the market continues to defy our logic. With this latest selloff it feels like this could be the year. Regardless of how we feel though, the biggest mistake we can make is to become an emotional investor based on short-term news. Long-term investors need to be able to handle the bumps and we will do our best to help everyone through them whenever the false alarms prove real.
Other SMB News
- We are always trying to grow the number of advisors at our firm. We currently have eight advisors and have been in talks with multiple people who may want to join us. We look forward to adding another face in the office soon.
- The new building is coming along great and we plan to have an open house February 28th between 1pm – 6pm. Please feel free to come by, have some food, drinks, and check out the new digs. Another invitation closer to the day of will be sent out with directions and times.
- Our firm broke through $100 Million in assets under management (AUM) this year. That’s a very big deal for us and has been our goal since we left Principal Financial Group in 2010 with $20 Million in AUM. Bruce and I are so thrilled to have such wonderful advisors, employees and of course our clients/friends to work with. We feel incredibly fortunate to work with such great people and look forward to many more years working together.
We’ll be working through our call list to try and talk with every client before tax time. We look forward to talking with you, but if something comes up before then, please don’t hesitate to contact us.
-Tim Porter, CFP®