With intelligence and integrity we protect and grow the financial assets of individuals, families, and institutional investors worldwide, giving them the freedom to live richer, more fulfilling lives.
An Important Communication from the Chief Investment Officer
October 14, 2016
As you know, many areas where Coastwise invests (dividend paying stocks, foreign markets, etc.) have performed well year to date.
The reality of stock markets, however, is that they periodically experience material declines on their way to ever higher prices over the long term. Near term declines – called corrections (10%+ declines), or bear markets (20%+ declines) - are never predictable in terms of when, for how long, or to what degree the price declines unfold. Just look at recent material stock declines and how quickly the recoveries took place:
Statistics show that those who attempt to time markets - dart in and out of stocks with the goal of missing the declines but participating in all the upside - significantly underperform those who simply stay invested and ride out the unpredictable short term ups and downs. In September 2015, blue chip GE hit a panic low of $19.37 (down from around $28 just a few weeks prior), only to rally approximately 50% in around 30 trading days. Those who attempted to time these quick moves by and large sold low and bought high – hence the huge under performance of market timers – even those who do it for a living.
Even bear market declines of 20%+ tend to be fairly short lived - the average one taking around 3 years to recover any losses. On a related note, the famous Keynes outperformed UK stock market by nearly 6% annually. Did he do this through timing the markets? Far from it. In fact, he underperformed UK stocks by over 40% during a 5 year stretch. But he had the mental makeup and approach of all successful investors, namely a methodical, highly disciplined investing program. Specifically, Keynes knew that barging into bear markets to buy rather than trying to side step them is the way to prevail. The 3 key ingredients to his success? Cash, courage and patience.
Fast forward from Keynes’ era to today. The US stock market is about 2,400 days into a bull market, one of the top 3 longest in history. There are smart, well intended financial commentators on both sides of the argument as to whether the current bull market has further to run. The fact is: no one will know when a bear market will hit until well after it has reared its nasty teeth. So what should an investor do, or more specifically, what are we doing about it? As always, it comes down to timing. Not timing the market, but timing as to when you need to convert stocks into cash (when you need the money for other purposes – retirement expense, etc.). Investors fall into one of three categories:
You need to withdraw some cash in the next 3 years.
You don’t need any cash in the next 3 years.
You will be adding cash to your account over the next 3 years.
If you are in category #1 and we don’t already have clear instructions as to your cash needs – how much and when - then please contact us so that we can adjust your portfolio accordingly. If you are in bucket #2, then other maintaining our usual disciplined approach of taking profits from time to time as a risk control measure and redeploying those profits into more attractive opportunities, we will be staying the course. Dividends will continue to be reinvested meaning that more shares will be purchased at lower prices should stocks decline over the next few years. For those in category #3, the addition of new capital at lower prices – as evidenced by Keynes’ approach and results – means that a bear market is your friend, not your foe.
The bottom line is that no one knows when the next bear market will occur or what it will look like in terms of severity, duration, etc. An intelligent investor could have – and many did – say a bear market was around the corner in 2012… and 2013… and 2014… and 2015… only to miss subsequent stock gains and dividend payments. What we do have control over is how we allocate capital and our actions during inevitable market declines. Having a clear plan, a pre-thought out strategy, and sticking to it with discipline rather than reacting to short-term events based on emotions is vital for long term success.
As always we appreciate your valued business and are here to answer any questions you may have.
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