One of my resolutions for the year is to more frequently post blogs regarding markets, and what we may, or may not, be looking forward to. It appears more and more likely that markets are experiencing a traditional bear phase.
Lest we forget, 2017 surprised a lot of observers with an extraordinary rise following a contentious political cycle. This went on at a time when markets, by every historical measure, were already at extreme high valuations.
I confess to an element of frustration with some observer’s that ignore that performance was especially driven by tech stocks, and the FAANG in particular. Other sector returns were much more muted, with the next best performing group Materials, at up 22% in that period.
But everyone wants to beat the market, right? Well in the real world, chasing performance will get you slaughtered in the end, sort of what happens when the dog chasing the car latches his teeth on the tire. This year is proving that what must go up, will come down, and vice-versa.
So markets are down around 10% this year, and creeping lower, even as the a) economy seems to be doing okay, b) corporate earnings are rising, and c) interest rates continue to remain low by historical comparison. This contradiction is a sign of enthusiasm leaving the market, even in the face of a fair wind, and may be a sure sign of the impending growl of the bear.
Our investment strategy has always been to remain diversified, and not attempt to time the markets, but play defense when it appears markets are too hot. Last year was too hot, especially when a very large majority of economists and market strategists are calling for middling single-digit returns over the next 10 years.
More recently, our accounts have avoided the kind of fall that the broad markets have experienced, for both stocks and bonds, because of our caution and long-term focus. We are not going to change that. As we may be more cautious at the highs, you can expect us to take advantage at corrections.
Our expectation is that markets will reflect valuation over the long-term, and we are closer to fair value than 3 months ago. They can certainly fall further as a bear market will, but a conversation I had in a locker room with a fellow exerciser truly reflects two keys to success:
1) Panic is not an investment strategy,
2) Long-term discipline is key to successful investing.
So if we failed to fully participate in last year’s gains, we will also endeavor not to fully participate in the losses.
Finally, critical to achieving your long-term life goals is to first have a plan, and establish an investment program to achieve it, with regular reviews to confirm it. Beating the S&P 500 is not a life goal.