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First Quarter 2019 Newsletter

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Everything Old is New Again

There is always a newer, cooler investment to catch your interest.  The large majority of those may seem to be too good to be true, and usually are.  This phenomenon didn’t just start in the last few months, years, or decades.  See below for charts of a really old one and a fairly recent one.

1Q19Img1-1

Whether you are talking about a market bubble in tulip bulbs during the 1600’s, or one in Bitcoin in the last couple of years, you can see that human emotion brings a wide swing in prices, on the way up and down.  At their peaks, most speculators believed great things would continue with both of those “investments” (and we use that term very loosely.)  But it doesn’t have to be so exotic.  Fad investing can encompass countries, industries, as well as individual stocks. Over the last several decades, there have been many investment fads that have come and gone.  See how many of them you remember…

  • Nifty Fifty stocks
  • GoGo stocks
  • Biotech stocks
  • Asian Tiger stocks
  • Dot Com stocks
  • BRIC Stocks (Brazil, Russia, India, China)
  • 130/30 funds
  •  Black Swan funds
  • Bitcoin
  • FAANG stocks
  • Marijuana stocks
  • And so on, ad infinitum…

Investors looking at some of these investing fads retrospectively may chuckle and question how so many people made such silly choices.  By the same token, who hasn’t reviewed the long term record of a single company and counted the imaginary fortune they could have made if they just bought a certain stock held it for 10, 20 or 30 years (Google, Amazon, etc.) and counted the millions it would have added to their net worth. 

Remember that most investing fads, and in fact most mutual funds, do not stand the test of time. Even a large portion of equity mutual funds fail to survive over the longer term. As an example, for equity mutual funds available to US investors that were available 15 years ago, 49% are no longer in existence.  Source: DFA Inc. 1/2019

When confronted with choices about whether to add additional types of assets or strategies to a portfolio, it may be helpful to ask the following questions:

  1. What is this strategy claiming to provide that is not already in my portfolio?
  2. If it is not in my portfolio, can I reasonably expect that including it or focusing on it will increase expected returns, reduce expected volatility, or help me achieve my investment goal?
  3. Am I comfortable with the range of potential outcomes?

If the answers to any of these questions leave doubts in your mind, then we recommend you consider not including it in your portfolio.  Most of the time, the risk/reward of these new ideas is unclear, and the majority of time the risk side of the equation is dramatically underrepresented in the thought process. 

Investment fads du jour are as old as the origin of public markets.  But investors should remember that a long-term, diversified and disciplined investment approach based on robust academic research and implementation may be the most reliable path to success in the global capital markets.

First Quarter 2019 Asset Class Returns

1Q19Returns1

Global equity markets experienced dramatic pullbacks in the 4th quarter of 2018 and spent the first quarter of 2019 climbing back and canceling the majority of losses experienced just three months earlier.  Below is the chart of one of our asset classes, the S&P500, reflecting the 4th quarter decline and 1st quarter rebound.

1Q19Img2-2

Those investors who fled the markets in late December because of their certainty that the doom and gloom would continue were foiled, once again.  It is nearly impossible to consistently time the markets.  Further, reacting to current market movements by jumping in or out of a soundly planned portfolio will usually guarantee underperforming the long-term potential of a properly disciplined approach.

In the first quarter of 2019, all US equity asset classes experienced generous double digit returns.  In addition, all income maturities experienced gains.  Foreign equity asset classes had positive returns as well, however only a few had greater than high single digit returns. 

This market strength might lead you to believe that global economies and politics have somewhat steadied and become more predictable, but that is clearly not the case.  Domestically, the two-year Mueller investigation is finally over, yet there seems to be no end to the bickering and partisanship of the political parties.  US-China trade discussions continue, with alternatively positive and negative signs emerging almost weekly.  There is an expected agreement by those in the know, but it may drag on for months, all the while continuing to put a damper on both economies. 

Brexit negotiations appear to be in a helter-skelter format, with questions of whether Prime Minister May will still be in office by the time anything is figured out.  Finally, the European political landscape is also in relative upheaval.  Nationalism has caused each country to question several current policies, and protests, led by the Yellow Vests in France, are becoming more frequent.  Both economic activity and market performance could change if there is a shift away from current administrations, which appears to be a definite possibility.

Back in the US, unemployment remains low.  Corporate earnings have slowed a bit compared to last year’s reflection of corporate tax law changes, but still are attractive.  The Federal Reserve has noticed the global economic slowdown and is no longer talking about multiple interest rate increases for 2019.  The flattish yield curve is causing some market prognosticators to fear a recession and a weak market environment.  However, as shown in the chart above, the equity markets had the chance to continue their downward slide in 2019, but quickly reverted back to an upward trend.  All in all, we are in the same situation we have been in for the last several years: fully valued markets, positive earnings environment, and a cautiously optimistic view on full year 2019 stock market potentials. 

By next quarter we will undoubtedly know more about Brexit, US-China trade, the slowdown of the global economy and many other issues discussed above.  In the meantime, let’s all get outside and enjoy the warming weather and visual beauty of springtime!

Sincerely,

ricksig

Frederick F. Kramer IV, JD
Co-Chief Investment Officer


The content in this newsletter is for informational purposes only and does not constitute investment advice or an offer to buy or sell any security. The information in this newsletter is believed to be accurate as of the time it is distributed and may become inaccurate or outdated with the passage of time. You should contact your financial advisor or CPA professional before making any tax or investment-related decision.  Past performance does not guarantee future results.  All investments may lose money.

Attachments

  1. 1Q19InvestmentNewsletter.pdf 4/10/2019 10:16:43 AM