• It will be worth restating, even in the context of a letter primarily focused on the year just past, my overall philosophy of investment advice. It is goal-focused and planning-driven, as sharply distinguished from an approach that is market-focused and current-events-driven. Every successful investor I've ever known was acting continuously on a plan; failed investors, in my experience, get that way by reacting to current events in the economy and the markets.
• I neither forecast the economy, nor attempt to time the markets, nor predict which market sectors will “outperform” which others over the next block of time. In a sentence that always bears repeating: I'm a planner rather than a prognosticator.
• Once a client family and I have a plan in place—and have funded it with what have historically been the most appropriate types of investments—I'll hardly ever recommend changing the portfolio so long as your long-term goals haven't changed. As a general statement, I've found that the more often investors change their portfolios (in response to the market fears or fads of the moment), the worse their long-term results.
•In sum, my essential principles of portfolio management are fourfold. (1) The performance of a portfolio relative to a benchmark is largely irrelevant to long-term financial success. (2) The only benchmark we should care about is the one that indicates whether you are on track to accomplish your financial goals. (3) Risk should be measured as the probability that you won't achieve your goals. (4) Investing should have the exclusive objective of minimizing that risk.
Part Two: Current Observations
• Two thousand eighteen was perhaps the strangest year I've experienced in my career as a financial advisor. Most importantly, it was one of the truly great years in the history of the American economy, and by far the best one since the global financial crisis of 10 years past. Paradoxically, it was also a year in which the equity market could not get out of its own way.
• It is almost impossible to cite all the major metrics of the economy which blazed ahead in 2018. Worker productivity, which is the long-run key to economic growth and a higher standard of living, surged. Wage growth accelerated in response to a rapidly falling unemployment rate. Household net worth rose above $100 trillion for the first time, yet household debt relative to net worth remained historically low. Finally—and to me this sums up the entire remarkable year—for the first time in American history, the number of open job listings exceeded the number of people seeking employment.
• Earnings of the S&P 500 companies, paced by robust GDP growth and significant corporate tax reform, leaped upward by more than 20%. Cash dividends set a new record; indeed total cash returned to shareholders from dividends and share repurchases since the trough of the Great Panic reached $7 trillion.
• But the equity market had other things on its mind. Having gone straight up without a correction throughout 2017, the S&P 500 came roaring into 2018 at 2,674—probably somewhat ahead of itself, as it seemed to be discounting the entire future effect of corporate tax cuts in one gulp. There ensued in February a 10% correction, followed by several months of consolidation. The advance resumed as summer waned, with the Index reaching a new all-time high of 2,931 in late September. It then gave way to a second correction which settled on a closing low of 2351 on Christmas Eve. This correction of 19.78% is close enough to 20% to technically be called a bear market move and by year end the S&P 500 settled at 2507. No doubt many of you, like me, were barraged by the so called “experts” with some iteration of “Stock Market Suffers Worst Year Since 2008 Financial Crisis!”. A true statement on its surface, but a look into the numbers help to put it into perspective. In 2008 the S&P 500 was down 38.5% and then resumed its advancement to close out 2018 at 2507 (a gain of 178% after factoring in 2018’s decline of a little over 6%). For some context the only other calendar year decline from 2008 to 2018 was the year 2015 which registered a negative return of 0.73%
.• The major economic and market imponderable as the year turns is trade policy, which in the larger sense is an inquiry into the mind of President Trump. I think it fair to say, as the economist Scott Grannis recently did, that “Trump has managed to reduce tax and regulatory burdens in impressive fashion, but his tweets and his tariff threats have created unnecessary distractions and unfortunate uncertainties, not to mention higher prices for an array of imported consumer goods.”
• These and other uncertainties—perhaps chief among them Fed policy and an aging expansion—were weighing heavily on investor psychology as the year drew to a close. For whatever it may be worth, my experience has been that negative investor sentiment—and the resulting equity price weakness—have usually presented the patient, disciplined long-term investor with enhanced opportunity. As the wise and witty Sage of Omaha wrote in his 1994 shareholder letter, “Fear is the foe of the faddist, but the friend of the fundamentalist.”
Dear clients and friends, I hope you found this information to be helpful. As always, if you would like to discuss this in more detail, please feel free to reach out to us at DCH Wealth Management or give me a call at 727-914-7462 and we can talk.
Warm Regards,
David R Henderson
This is being provided for informational purposes only and should not be construed as a recommendation to buy or sell any specific securities. Past performance is no guarantee of future results, and all investing involves risk. Index returns shown are not reflective of actual performance nor reflect fees and expenses applicable to investing. One cannot invest directly in an index. DCH Wealth Management, nor any of its members are tax accountants or legal attorneys, and do not provide tax or legal advice. For tax or legal advice, you should consult your tax or legal professional. The views expressed are those of DCH Wealth Management and do not necessarily reflect the views of Mutual Advisors, LLC or any of its affiliates. Investment advisory services offered through Mutual Advisors, LLC DBA DCH Wealth Management, a SEC registered investment adviser. Securities offered through Mutual Securities, Inc., member FINRA/SIPC. Mutual Securities, Inc. and Mutual Advisors, LLC are affiliated companies.
