eFocus @ Legacy
Author: David Trotter, Trust
Take a long-term, disciplined approach for investment success
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.