End of Year Update
We hope our letter finds you and your families doing well and enjoying the holidays.
To say that the past couple months have been volatile would be an understatement. 2017 was characterized by abnormally low volatility and outsized returns, but we have been through two stock market corrections so far in 2018: one in February, and the one we are currently experiencing.
What is the concern in the marketplace? We see a few prominent factors driving investors’ concern:
Interest rates are rising, which particularly affects technology stocks, big drivers of market gains.
Because interest rates are going up, many investors are selling market holdings to prefer interest-bearing investment options.
We have seen political unrest in the form of deeply contested midterm elections and tariff battles ongoing since March.
The volatility we lacked in 2017 has returned.
The general sense among investors is that we are late in an economic cycle, and we would tend to agree with this. The public is growing concerned that we may soon see an inverted yield curve, in which short-term treasury bonds have a higher yield than long-term treasury bonds. This is a sign that investors are heavily seeking the stability of long-term bonds, and in the past has been an indication that a recession could be 12 to 18 months away.
This fear has led to the market volatility we are experiencing. This level of market volatility is stressful in the short term, especially after last year’s relative calm, but is not by any means unprecedented. BlackRock recently published a piece showing that the S&P 500 has had twelve trading days year-to-date where the index has swung at least 2% up or down (data through 10/31/2018). The average annual number of trading days like this since 1950 is 11. The twelve days this year include ten trading days down 2% but only two days where the market gained 2%.
When we see these types of markets, it becomes more difficult to focus on the long-term strategy of the portfolio and the way it was constructed, and how that ties into your long-term goals. Our instinct is to avoid losses. However, it is hugely important to stay invested during times of volatility, as this chart from BlackRock illustrates:
Even missing the five top trading days over the last 20 years lowered a portfolio by nearly half its value. Because losses are not concrete until funds have been sold to cash, we encourage you to remain invested and not pull out at a low point.
When we construct our portfolios, diversification is extremely important to us. Diversification is the practice of spreading your investments arounds so that your exposure to any one asset or type of asset is limited. This is designed to help reduce the volatility of your portfolio over time and balance the risk and reward in your investment portfolio. It does not eliminate losses, but over the long term has been beneficial. There is a saying in the markets called “S&P 500 Envy,” where investors who are watching just the largest companies in the US stock market want to emulate their returns. However, this often is not the best stance for your portfolio, because those companies tend to rise and fall together. Blackrock went back to 2000 and put together a great slide on the power of diversifying your portfolio:
On another note, contribution limits to IRAs, 401ks, and other retirement plans have increased for 2018.
For 401(k), 403(b), 457 (also know as deferred compensation), and Thrift Savings Plan contributions, the maximum employee deferral contribution has increased from $18,500 to $19,000. Catch-up contributions remain at $6,000, so over 50 the new maximum is $25,000. This is a great opportunity to check and make sure that if you are maximizing contributions, your payroll person or 401(k) website won’t stay stuck on last year’s figure.
For Traditional and Roth IRA contributions, the maximum limit has increased to $6,000 from $5,500. Catch-up contributions remain at $1,000, so over age 50 the new maximum is $7,000. If you are maxing out an IRA account with us as part of your overall plan, we encourage you to contact us so we can get your contributions updated for the new year.
Here's wishing you and yours a festive rest of the holiday season, and as always, please feel to reach out if you need anything.