eFocus @ Legacy

January 2014

Author: David TrotterTrust Investment Officer

Take a long-term, disciplined approach for investment success in 2014

The S&P 500 Index marched higher in 2013 by posting a total return of 32.4%, the largest annual gain since 1997. The total return from the March 2009 low now stands at eye popping 202.6% or 25.9% on an annualized basis. On the other end of spectrum, the gold bugs were left scratching their heads about a 28.3% loss, the first down year in gold since 2000. The Federal Reserve's talk of tapering gave bond investors their first taste of what a rising rate environment might feel like as the Barclays Aggregate Bond Index lost 2.0%, the first year in the red since 1999. Looking ahead to 2014, the bulls are hoping for a pickup in earnings growth, continued strength in housing and an improving labor market that will propel equity indices to new highs. On the other hand, the bears are pointing to the looming debt ceiling negotiations, record high profit margins and the Federal Reserve slowing its pace of asset purchases.

As 2014 kicks off there are currently more bulls than bears. According to data compiled from Bloomberg and weighting the one-year price targets for the S&P 500 constituents, the estimated closing price for the index at the end of 2014 is 1,963 or an increase of about 6% over the 2013 closing price. Although market pundits might have well-thought-out arguments on both sides, it's my opinion that it's impossible to consistently and accurately predict one-year market returns. Attempting to guess where the market will be one year from now is counterproductive; it distracts investors from their long-term investment plan and results in suboptimal decision-making. As Peter Lynch once said, "I can't recall ever once having seen the name of a market timer on Forbes' annual list of the richest people in the world. If it were truly possible to predict corrections, you'd think somebody would have made billions by doing it."

Considering the strong stock-market returns of the past several years, but facing the prospects of rising interest rates which will continue to be a drag for bond investors, we are maintaining our equity exposure, albeit with a bias towards lower volatility equity holdings. We also believe that Europe has lagged the U.S. on its growth track, and shifting assets from domestic to foreign, developed markets makes sense at this time.

While we make these small adjustments to our clients' portfolios, it's important to remember three points that I consider important to investment success: 1) Keep a long-term view. In the short run, markets will move up and down aimlessly, big moves in both directions will come and go, and by not getting distracted by market noise you'll make better choices. 2) Asset Allocation will determine over 90% of your portfolio returns. Determining your time horizon will drive your asset allocations. Generally speaking, if you are still 15 years or more away from spending the money, it should be heavily invested in stocks. As the time horizon shortens, adjustments should be considered to temper volatility risk. 3) Develop a disciplined, long-term plan and worry less about the short-term. Investing is more about avoiding the big mistakes than it is finding the next big biotechnology stock. Having a well-thought-out investment process ahead of any market turbulence will make you more confident and more likely to stick to your plan when the going gets tough.

As always, all of us at Legacy are willing to review and discuss your investment objectives or planning needs and goals for the future as we contemplate the beginning of a New Year.