2019 Annual Letter to Clients

In January, I sent out the following letter to all of my clients offering perspective on the events of 2018 and the year ahead.  Enjoy!

Dear Client:

I want to open this letter by wishing you and your family a happy new year! Thank you for continuing to trust me on your path to financial independence and wealth.

2018 was indeed an interesting year in financial markets. After reaching highs in January, world stocks trended down for the rest of the year.  That reality went unnoticed in our friendly financial media as U.S. stock markets rebounded from their February lows.  The year ended with a bang, though, as the S&P 500 fell 17% by December 31st from its September high.  As that happened, our dependable media prognosticators certainly sounded the crisis alarm with comparisons to the financial crisis and the Great Depression!

       You may be expecting to read my 2019 market predictions, but I shall offer nothing of the sort.  Rather, in the context of current events, it is worth using this space to reiterate the nature of my advice.  Generally speaking, successful investing is goal-focused and plan-driven, while most failed investing is market-focused and performance-driven.  In other words, success requires investing according to your plan, which we have developed and will continuously adapt to changes in your life, tuning out the fads and fears of the moment.  Failed investors instead focus on reacting to economic and market news.

Most of my clients- and I certainly include you in this generalization- are working on multi-decade and potentially multi-generational plans for such great goals as education, independence, retirement, and charity.  Current events in the economy and the markets are, in that sense, distractions of one sort or another.  For this reason, I make no attempt to infer an investment policy from today’s or tomorrow’s headlines but rather align clients’ portfolios and financial decisions with their most cherished goals.

I believe that my highest value services are planning and behavioral coaching—helping clients avoid overreacting to market events, both negative and positive.

My principles of portfolio management in pursuit of my clients’ goals are relatively straightforward:

  1. The only benchmark we should care about is one that indicates whether you are on track to accomplish your financial and life goals.
  2. The performance relative to indexes as benchmarks is largely irrelevant to financial success.
  3. Risk should be measured as the probability that you won’t achieve your financial goals.
  4. Investing should have the exclusive objective of minimizing that risk to the greatest practical extent.

Once a client and I have put a long-term plan in place and funded it with investments that are historically best suited to its achievement, I rarely recommend significant changes beyond regular rebalancing.  In other words: if your goals and plan haven’t changed, don’t change the portfolio.  The more often people change their investments, the worse their results tend to become.  I agree with Nobel Prize-winning behavioral economist Daniel Kahneman when he said: “All of us would be better investors if we just made fewer decisions.”

Going back to 1980, the average annual intra-year decline in the S&P 500 index has been 14%.[i] Yet, even without counting dividends, annual returns have been positive in 29 of these 39 years and the index has gone from 106 at the beginning of 1980 to 2,507 at the end of 2018.[ii]  The lesson we should draw from these data is that–historically, at least–temporary market declines have been very different from a permanent loss of capital. The most effective antidote to volatility has merely been the passage of time.

One of the enduring mysteries of financial journalism is that it always manages to see the equity market as “overvalued.” I beg to differ, not at all in the sense of predicting what the market will do in 2019, but in the hope of providing the ever important context to where we are.  According to the statistical research service FactSet, the current consensus earnings (also known as profits) estimate for the S&P 500 in 2019 is $174.[iii]  At its 2018 close, the 2019 price to earnings (PE) multiple was 14.4.  The 25-year average forward PE ratio is 16.1.[iv]If we accept the consensus earnings estimate as generally correct, it is difficult to see the U.S. market’s current value as being anything abnormal or overvalued.  I would add, however, that current valuation has never been a particularly reliable market timing tool.

Recent media articles have also sensationalized the idea of the “everything bubble,” often on the back of data lacking any context whatsoever.  For example, we’ve seen many articles about the record amount of household debt in the U.S.  Without accounting for inflation and knowing the current value of household assets, an isolated data point becomes a rationale to retreat to our bugout shelter! Currently, household debt in the United States stands at $15.7 trillion. However, that debt is also backed by a record $122 trillion in household assets.[v]  Furthermore, debt payments as a percentage of income are near their lowest since 1980.[vi]

December’s market declines were reportedly fueled by concerns about economic growth in 2019.  Goldman Sachs projects Gross Domestic Product (GDP) will grow by 2.5% in 2019.[vii]  That’s a bit lower than 2018’s 3% growth.[viii]  To put that lower growth number in perspective, it still means that the U.S. economy should grow by $516 billion in 2019.[ix]  Not as much growth as I’d like, but hardly a crisis.

With all of that said, I cannot predict that everything will work out optimally for everyone in 2019… or any year for that matter.  I can only fall back on the wisdom of the great investor and philanthropist John Templeton, who said that among the four most dangerous words in investing are “It’s different this time.”

The nature of successful investing is the practice of rationality under uncertainty.  We will never have all of the information we want because we invest in and for an essentially unknowable future. Therefore, we practice the principles of long-term investing that have most reliably yielded favorable results over time: planning, rational optimism, patience, and discipline.  These will continue to be the fundamental building blocks of my advice in 2019 and beyond.

Again, thank you for trusting me and I look forward to another year of great progress toward your goals!

Yours Truly,

Derek Merkler

 


If you have any questions or would like to learn more about developing strategies to pursue a prosperous and safe future, contact me today at Derek.Merkler@Parsonex.com! You can also visit my website to learn about how I help our service members and veterans plan for and achieve financial independence.

My blog discusses a myriad of financial topics and challenges, book reviews, and commentary on current events in the financial world to benefit our military and veteran community.  I attempt to be as thorough as possible when examining each subject but can never account for every possible scenario.  Please remember to consult with your advisers for advice on your particular situation.  Thank you for reading!

Advisory Services offered through Parsonex Advisory Services, Inc. 8310 S. Valley Highway, Ste. 110, Englewood, CO 80112 (303) 662-8700.


Sources:

[i]J.P. Morgan Guide to the Markets, Slide 14. Updated November 30, 2018. https://am.jpmorgan.com/us/en/asset-management/gim/adv/insights/guide-to-the-markets/viewer

[ii]Ibid.

[iii]FactSet Earnings Insight, Slide 30. Updated December 21, 2018. https://www.factset.com/hubfs/Resources%20Section/Research%20Desk/Earnings%20Insight/EarningsInsight_122118.pdf

[iv]J.P. Morgan Guide to the Markets, Slide 5. Updated November 30, 2018. https://am.jpmorgan.com/us/en/asset-management/gim/adv/insights/guide-to-the-markets/viewer

 [v]Ibid., Slide 20.

[vi]Ibid.

[vii]Goldman Sachs 2019 Outlook, Page 12. https://www.goldmansachs.com/insights/pages/outlook-2019/us-outlook/report.pdf

[viii]Ibid.

[ix]Gross Domestic Product. Published by the Federal Reserve Bank of St. Louis, December 21, 2018. https://fred.stlouisfed.org/series/GDP.

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