With all due respect to the second and third Toy Story movies, it’s hard to beat the first one. One of my favorite scenes is when Buzz Lightyear convinces everyone that he can fly. Through a series of fortunate events, he floats around the room, assuring everyone present of his aerial abilities.
As Buzz floats back to the ground, an exasperated Woody can only stand there helpless, yelling to anyone who will listen “that isn’t real, he is just a toy!” No one can hear him though; they are too enthralled with Buzz and his performance to pay attention to Woody.
Toy Story may be a great movie, but why are we talking about it in an investment newsletter? Because when the stock market performs so well, for so long, everyone becomes Buzz Lightyear.
My 401(k) is up significantly over the last several years…I can fly! I bought some Apple stock a few years ago…stand back everyone; I have this under control!
I’m not picking solely on individual investors who think they have mastered investing; investment advisors can be (and typically are) just as guilty. When something new and shiny arrives on the scene, it is hard not to be distracted, especially when we all want so desperately to make the best decisions for our clients.
As tempting as it is, however, the best decision for our clients is not to pretend Buzz can fly. Our highest value is to accept our fate as that old curmudgeon, Woody, and shout to anyone that will listen that what you can plainly see in front of you is not sustainable.
I understand your inboxes and Facebook news feeds are flowing with Buzz Lightyears who insist you are missing out on a secret that everyone else knows. I can assure you that is not the case. It is unlikely you will stumble across an investment strategy that I have not already researched, and discarded, on your behalf.
Focusing on what is real isn’t to say that the stock market can’t, or won’t, continue to climb. It’s simply to remind you that diversification has been a great strategy for all recorded human history, and is likely to be moving forward as well.
For those of you would like more detail on the investment climate besides a cartoon analogy, our regular second quarter commentary is below. And for the rest of you, with your head pointed towards the sky, wondering if just maybe Buzz can fly, know that we have our feet planted firmly on the ground, executing daily on the fundamentals that will help you achieve your goals.
We appreciate your trust and confidence. As always, please let us know if we can be of service to you or your family.
It has been an awfully good year in most of the capital markets so far, and from an economic standpoint, there has been much to be cheerful about. Corporate earnings in the first quarter came in above expectations and sharply higher than preceding quarters.
Unemployment is very low, and while we haven’t seen a dramatic uptick in wages, we see what looks close to full employment. GDP growth continues to show positive numbers even if the pace of growth is somewhat slower than we would like it to be. Good things haven’t been confined to our shores either; Europe’s economy, in spite of Brexit and some tough election cycles, has continued to firm, China continues to grow, even with concerns about banking and debt, India and other parts of Asia show steady progress, and South American economies continue to improve despite the political turmoil in Brazil and elsewhere.
There doesn’t seem to be any sign of recession on the horizon as yet; the Fed continues to be both transparent about and circumspect towards the execution of rate changes. Our government is promising lower taxes and less regulation, items that can cheer even the most gloomy business owner.
So what could possibly go wrong?
It’s important to remember (or perhaps re-remember) that markets don’t move in a straight line, not very often at any rate. We’ve had 16 periods of downward market movement since the bull began running back in early 2009! It is entirely possible that we are ready for another, and we think it a useful endeavor to remind ourselves of this every so often. Bear markets begin when markets or economies get pretty far out of alignment, and while we don’t think we’re seeing any of that right now, the garden variety market correction can strike at any time.
As always, our defense is two-fold, good planning and diversification. In regards to the former, we sure don’t want to get too excited about stock market gyrations that concern money we won’t be touching for a long time; we know we can’t really time the market and we also know that over the long-term stocks tend to give superior returns in spite of that very same volatility.
So far this year we’ve responded to increasing valuation by seeking more conservative options in several parts of your portfolio. Early in the year, we continued the process of selling high yield issues and repositioning into higher quality and floating rate bonds; this done with an eye toward the twin risks of bond investments, credit quality, and interest rate risk. On the equity side, we have pared back risk in a few ways, first by slimming down growth stocks in favor of a more balanced core approach in the large US stock segment, and also by underweighting more volatile medium sized company stocks in favor of larger company stock.
We, of course, don’t know if the second half of 2017 will be as productive as the first has been. As mentioned earlier, we don’t think we’re on the verge of a recessionary time, and that bodes well for the economy over the short and intermediate term. US stocks appear a bit richer than average, but that has been the case for some time, and that modest overvaluation has moderated a bit in light of the robust first quarter earnings.
We’re also cognizant of the fact that reasonable investment time horizons are often greater than attention spans and this can create volatility once someone in the proverbial theater yells “fire”! Watching that sort of “running for the exits” is always disconcerting. It is the age old story: we tolerate shorter term volatility for longer term performance; it isn’t always fun, but over time it works exceedingly well.
We hope the rest of this year is fruitful for you and your family and that you get to enjoy the best of what summer has to offer.
Steve Larsen, CPA, CFP®