Every January, I send a printed letter to all of my clients detailing events of the previous year and some thoughts about moving forward. I also use the letter as an opportunity to emphasize the fundamentals of financial planning in the battle against the noise of the financial media.
As of the date of this post, May 1, 2020, we are in the midst of a global pandemic and government stay-at-home orders. The fundamentals espoused in this letter are as important as ever. And I’m sharing this letter with you below:
Oh, how far we’ve come in a year! Last year, as I began penning the 2019 edition of this letter, only days had passed since U.S. stocks touched bear market territory (20% below the previous high). Everyone was confident that the U.S. and world economies were tumbling into a recession…
That was the best-case scenario. Some were expecting a crash or apocalypse. Why? Pick your poison. Click-bait headlines proposed any number of potential calamities that might have brought life to a screeching halt.
Alas, we are still here! In 2019, the S&P 500, which is an index that represents large U.S. companies, returned a smidgen under 29%. The MSCI All-Country World Index ex-U.S., representing companies from outside of the U.S., rose 22%.[i] I could cite several more of the thousands of indices that exist, but those two are the most relevant.
I forgive you if you think that those investment returns alongside other positive economic news would signal the all-clear. But, if anything, the drumbeat of negativity from the financial media, politicians, and whole-life insurance salespeople has reached what one might classify as a shriek.
Now, if you haven’t read one of my annual letters before, you might be expecting predictions for 2020.
I shall offer none, however.
I have no crystal ball, and any prediction by me or anyone else would not be worth the paper upon which it was written. Instead, with the new year upon us and a year of great returns behind us, we should review the fundamental principles that form the pillars of our financial and investment plans:
- Our ability to regularly save a portion of our income and avoid bad debts are the most important two factors in our financial
- Financial and investment risk should be measured as the probability that we won’t achieve our goals. Investing should have the sole objective of minimizing that risk to the greatest practical extent.
- A globally diversified portfolio of equities is the most reliable way to build wealth over decades in excess of inflation. Being globally diversified means always underperforming some countries or sectors and outperforming others.
- Avoiding the big mistakes like chasing investment fads (bitcoin, dotcom, tulip bulbs) and selling out of fear during bear markets is the most important factor in our investment success, adding several percentage points to our long-term returns compared to the average investor.[ii] We can expect our investments to temporarily fall in value an average of 14% top to bottom in any given year.[iii] And by my count, there have been 15 “bear markets” in equities since the end of World War II (one every 5 years). The average depth of these declines was something on the order of 30%.[iv] But in 1945 the forerunner of the S&P 500 index was about 16[v]; it ended 2019 at 3,231. Thus, at least historically, the permanent advance has triumphed over the temporary decline… even when it seemed to be the end of the world at the time.
- In terms of market timing or picking the right funds/sectors (overconcentration), the consequences of failure significantly outweigh the benefits of success.
We can never have full certainty in what lies in our investment future because we invest in and for an inherently unknowable future. Therefore, we can only practice these principles of long-term investing that have consistently yielded favorable results over time. These principles will continue to be the fundamental building blocks of my advice in 2020 and beyond.
With the new year also comes new resolutions, many of which can be classified as financial. My objective is to continue serving Veterans, their families, and other younger professionals with a high level of very personalized, wealth-building advice. As my business continues to grow, I know that I will only be able to serve a finite number of families. As I approach that point, I would much prefer to establish relationships with colleagues and friends of existing clients. I enjoy working with you and am sure that I would enjoy working with people whom you like and admire.
To that end, I will occasionally ask you to introduce me to such people—provided, of course, that you would be comfortable doing so. I don’t expect, and surely don’t deserve such introductions unless you are both satisfied and happy with the advice and service that I provide. That’s why I urge you to tell me, freely and frankly, about anything you need from me that I’m not doing.
But if, and only if I’m serving you as you’d hoped and expected, I’ll ask you to introduce me. I treasure my relationships with my clients and seek only to serve a few more people like you.
I welcome any suggestion that this letter sparks and look forward to speaking with you soon.
Thank you for trusting me as we make this journey together. Happy new year, happy new decade!
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.
[ii] Ibid., Slide 64.
[iii] Ibid., Slide 13.
[iv] Ibid., Slide 14.