Our Philosophy, the Economy and the Markets:  2018 in Review

Our Philosophy, the Economy and the Markets:  2018 in Review

| January 04, 2019

At the start of our 22nd year in business, it is worth restating, even in the context of a letter primarily focused on the year just past, our overall philosophy of investment advice. It is goal-focused and planning-driven, sharply distinguished from an approach that is market-focused and current-events-driven:

Every successful investor we’ve ever known was acting continuously on a plan; failed investors, in our experience, get that way by reacting to current events in the economy and the markets. We 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: We are planners rather than prognosticators.  Once a client has a plan in place—and has funded it with what we determine are the most appropriate types of investments—we’ll hardly ever recommend changing the portfolio so long as their long-term goals haven’t changed. As a general statement, we’ve found that the more often investors change their portfolios (in response to market fears or fads of the moment), the worse their long-term results will be.

In sum, our 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 most important 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.



2018 was perhaps the strangest year we’ve experienced in our careers as financial advisors. 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 us this sums up the entire remarkable year—for the first time in American history-- the number of open job listings exceeded the number of persons seeking employment!

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 went into a savage decline, falling to the threshold of bear market territory: S&P 2,351 on Christmas Eve, off 19.8% from the September high.* A rally in the last week of trading carried it back up to 2,507, but that still represented a solid six percent decline on the year, ignoring dividends.

Two thousand eighteen thus became the tenth year of the last 39 (beginning with 1980) in which the Index closed lower than where it began. At the long-term historical rate of one down year in four, that’s actually just par for the course. The major economic and market question as the year turns is trade policy, which in the larger sense is an inquiry into the mind of President Trump. We 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 ended. For whatever it may be worth, our 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 (Warren Buffett) wrote in his 1994 shareholder letter, “Fear is the foe of the faddist, but the friend of the fundamentalist.”

Please be invited, and indeed encouraged, to raise with us any questions that may have been prompted from this year-end summary.  That’s what we are here for!

All investing involves risk, including the possible loss of principal.  There is no assurance that any investment strategy will be successful. Indices are unmanaged and cannot be invested into directly. Past performance is not indicative of future results.

The Standard & Poor's 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general.

*Market data from Yahoo Finance: https://finance.yahoo.com/quote/%5EGSPC/history