“A big challenge for an advisor is to help clients understand that this was a normal outcome and that, ‘No, we don’t need to adjust our portfolio because this quarter it went down. This was in the range of perfectly reasonable outcomes.”
Kenneth French
Professor of Finance, Dartmouth
“The market is very, very risky, riskier than the standard models say.”
Benoit Mandelbrot, World Renowned Mathematician, 2004
“Whereas Treasury bills are guaranteed by the federal government, and are essentially risk free, investments in stocks are risky. Although the average rate of return has been 10 percent, there have been years when stocks have fallen by more than 30 percent.”
Richard Thaler, Professor of Behavioral Finance, University of Chicago
Author of Bestselling Book Nudge
“Often, the wisest thing to do during periods of extreme market volatility is to stick with the investment plan that you’ve already devised.”
Bill McNabb
Chairman, Vanguard
“The biggest misconception is that the Efficient Market Hypothesis implies low volatility. It doesn’t. It implies high volatility. Prices adjust quickly to new information. When uncertainty is very high, you expect volatility to be very high.”
Eugene Fama
Nobel Prize, Professor of Finance – University of Chicago
If an investor understands the 5 quotes above, they will be ahead of most of the “talking heads” on CNBC as well as the brokers at the big wirehouses.
Below is a list of the indices we follow. As you can see, it was a slightly negative quarter, which could be expected given the recent positive run and the natural volatility of the markets. Given the political turmoil and uncertainty, I am quite surprised that it was not even more volatile.
| Periodic Performance | |||||
| By 03/2018; Currency: USD | |||||
| 3 Months | 1 Year | 3 Years | 5 Years | 10 Years | |
| S&P 500 | -0.76 | 13.99 | 10.78 | 13.31 | 9.50 |
| Russell 2000 | -0.08 | 11.79 | 8.39 | 11.47 | 9.84 |
| Russell 2000 Value | -2.64 | 5.13 | 7.87 | 9.96 | 8.61 |
| MSCI World ex USA | -2.04 | 13.92 | 5.30 | 6.04 | 2.59 |
| MSCI World ex USA Small Cap | -0.50 | 21.16 | 11.30 | 9.71 | 5.81 |
| MSCI Emerging Markets | 1.42 | 24.93 | 8.81 | 4.99 | 3.02 |
| Bloomberg Barclays U.S. Treasury Bond 1-5 Years | -0.40 | -0.11 | 0.44 | 0.62 | 1.62 |
| ICE BofAML 1-Year US Treasury Note | 0.25 | 0.66 | 0.54 | 0.42 | 0.71 |
Tuning Out the Noise
The Folly of Forecasting Returns
In case a person thinks they can predictably forecast monthly returns, please see S&P 500 monthly returns from January 1970 until the end of March.
It is always a good reminder to visualize the “normal” fluctuations of the market. 364 months were positive, 214 were negative, and one month was essentially flat. Even though 37% of the months were negative, the index returned 10.46% annualized since January 1970. That is the benefit of discipline.
Cybersecurity – Double Authentication
We want to reiterate our concerns with cybersecurity. There have been increased levels of cybersecurity breaches, including wire fraud. One small step for clients to take is to turn on “double” or “2 Factor” authentication on your online services, including email, social media, investments and bank access. We know it is a bit of a pain, but it greatly decreases the risk of fraud, especially if your primary password gets compromised. We understand both Schwab and TD are working on this to make it available to clients. I urge you to take advantage of this protection with any service you are using where it is available.
Until next time,
Mike