Letter to Our Clients - June 2015
Dear Clients and Friends,
As I developed my idea for this month's client letter I had a theme to discuss that I thought was both very important and very timely. Before writing I looked back at some of the most recent letters we have sent to you, and I found that what I wanted to share with you now was actually very similar to what we have been sharing with you for a few years now. This message boils down to:
The stock and bond markets are high and have been for some time now. We should all be expecting their values to fall at some point and our account values to fluctuate. Most importantly, that should not be a bad thing.
If you've talked with us recently, or have read our recent letters, you will hopefully understand why we have been repeating the above message, and hopefully you will also believe it yourself. If not, please contact us so that we can discuss your situation in detail and craft a plan that will make you comfortable going forward.
Since we hope that topic has been covered thoroughly recently, I decided to look into our crystal ball and try to predict some of the headlines that we might expect to see in the news in the next 3-36 months. We do actually have a crystal ball here in the office, but unfortunately it has never delivered any prophecies to us, and my hopeful gaze didn't discover any magic answers this time either. So, the following headline predictions are simply my guesses, with no magic or science behind them at all.
Bull Market Over! This one seems fairly likely, because our current "bull market" in both stocks and bonds has been going strong for many years now; in fact it has become one of the longest “bull markets” in our history. There are many definitions of what constitutes a "bull market," but any way you look at it things have been pretty good in the US financial markets. Eventually the stock market will drop, and we will expect to see the above headline after one to three months of consecutive losses in the stock market, even if those losses are relatively small. We also expect that whoever writes that headline will also not have a working crystal ball, and will have no idea if a "bear market" is in fact coming or has arrived. They will simply be looking to sell more copies of their publication by guessing the future based on the past.
Bond Market Massacre! The bond markets of the world are fascinating and very complex, in many ways more complex than stock markets. Bond values rise when interest rates fall, and likewise bond values fall when interest rates rise. Looking back on our recent history, bonds have benefited from a 30+ year tailwind provided by an environment where interest rates were steadily dropping. Now with interest rates at record lows, we expect them to rise at some point in the future, and when they do they will cause bond values to drop. However, the "massacre" that bond values might experience will likely pale in comparison to the 50%+ drop in value that many stock markets experienced during the financial crisis. In addition, when you see headlines like this, remember that in your investment accounts you will not be exposed to "the bond market" in the general terms that the media uses. We help our clients decide how much of their portfolios should be invested in bonds, and then we help them choose specific kinds of bonds for specific purposes. Anytime you read or hear about "the bond market" (or the stock market, for that matter), know that it is an abstract term that does not directly relate to your investments.
For my last fictional headline, this is one we don't actually expect to see, but would wish for:
Financial Press Takes Solemn Vow To Stop Presenting Stories About Inconsequential Facts That Are Distorted To Seem Very Important And Are Meant To Incite Fear Or Greed In The General Public! The fact is that the change in the Dow Jones Industrial Average (which only measures 30 US companies) or next week’s GDP report does not materially affect your financial situation. Those numbers will go up and down like a buoy in the Tillamook Bay, and each swell or dip is reported on breathlessly as though it actually mattered in the long run. There is not always something worth reporting on in the financial world every day, but you will find the business section of the paper full of stories every day. For the most part, it is best to tune out the noise and remember that the financial press is working to bring news to you, but above all to sell as many copies or generate as much viewership as possible. This “news” is not designed to help you manage your financial life.
The financial world is an uncertain and ever changing place. Everyone’s financial health is affected by large and small events that occur all over the world. Everyone who has a job, or has money invested in stocks and bonds, or has any money in the bank, or has a mortgage or student loans, or even just keeps money under the mattress is affected by factors far outside of their control. We believe the best course is to make educated and deliberate decisions about your finances, then remain focused on your goals and not be concerned with outside forces over which you have no power. We encourage you to check in with us regularly to review your financial life, and to tune out the 24-hour news sources that are competing for your attention. Our goal is to help you have peace of mind and to be confident about where you are and where you are going in your financial life, and to help you continue to build for the future while enjoying the present!
Theodore R. Haley, CFP®, AIF®
Robert K. Haley, JD, CFP®, AIF®