Letter to Our Clients - October 2013
Dear Clients and Friends,
The financial industry is filled with nautical references, which is understandable, because being exposed to the financial world can often feel like being exposed to the elements on the high seas. Analogies and similar terminology aside, I often think of the two concepts as having a certain interesting commonality. Just as the oceans are made up of countless drops of water, stock markets are made up of large numbers of shares of all the different publicly traded companies in the world. The opportunities in each have enriched many and ruined others, but humans’ ability to navigate them successfully has greatly increased our quality of living. And predictions about how a stock market might behave on any given day are about as accurate as predicting what will happen in a certain stretch of ocean during that same day.
Oceans are moved by a plethora of forces. Nature sets the laws that govern the oceans as well as the rest of the world. The laws of gravity keep water from floating in air and affect the everyday movement of the seas by creating the tides. Forces below the surface, such as the currents, are the result of complicated interactions that create everyday movement, and random events such as earthquakes or whales passing beneath also impact how the surface appears at any given moment. Forces above the surface play a huge role as well. Some days there will be no wind at all and the surface can be flat and seem like glass, other days hurricanes pass through and create mountainous waves. Birds might land on the surface, tankers pass through, and submarines might pop up. In short, the oceans are the sum of all their drops of water, but are acted upon every day by both constant forces and unexpected events.
Similarly, stock market values are determined by the capitalistic world assigning value to shares of companies every day, and their values tend to float up and down every day, much like swells in the ocean. Some days, however, see sharp rises or drastic falls, much like giant waves passing through. The values are governed by laws, both actual laws passed by governments and by economic laws. They are affected by fundamentals, such as the general health of the economy and how profitable the individual companies are, something I would compare to the forces below affecting the surface. And they are influenced by external factors, which I would compare to the forces above the waves, such as terrorist attacks, war, and political and financial crises.
If you imagine the value of your investments as a boat floating on the surface of the ocean, you can imagine all the forces above and below that affect where your boat is right now. And you can see that whether the weather is calm or choppy, what really matters is that you continue to move forward towards your goals and stay afloat, and that the day-to-day ups and downs should not overly excite or concern us. While at a conference recently, a colleague of ours, Bill Leeb, shared his view with Bob and me which I will paraphrase, that "our job as advisors is to build ships to weather the storms, not avoid them." Whether these ships are investment portfolios or financial plans, I think this is a great analogy, because all we can do is help you make the best decisions we can in this moment and set sail on your course, and then adapt as the conditions change. It sounds tempting to try to sail in-between the tempests, but the reality is that making drastic decisions based on estimates or hunches leads to catastrophe most, if not all, of the time.
I bring all this up now because Bob and I want to share with you that we see storm clouds on the horizon of the financial seas. 2013 has been a good year for the stock markets, a challenging year for the bond markets, but overall remarkably calm and positive. However, looking forward there are several potential developments that concern us. The economy has been slowly but constantly improving, and it would be normal for growth to slow or stall for some period. Unemployment has been falling, but could hike up again unexpectedly for a variety of reasons. The Federal Reserve is in uncharted territory (another nautical reference!) and has been influencing the markets higher, but they could change course, or make a mistake and lose the confidence of the market. And our biggest concern at the moment is the gridlock in Washington. The current government shutdown is frustrating, but even more worrisome is the looming debt ceiling debate that could cause the United States of America to default on its debt if some compromises are not made. If this happens, there will be unpredictable consequences and could cause a financial hurricane similar to what we endured in 2008-2009.
We are not predicting that any of the above will actually happen, or what the consequences might be. We don’t see any cause for alarm, but we do see cause for caution. All of these ‘storms’ are above the surface and have the potential to rock our boats, but the fundamentals beneath the waves are still sound.
However, we wanted to reach out to you to make sure you were aware of the potential issues, so when you see headlines in the media you will not be surprised by what everyone will be talking about. We recommend that you stay the course and not make any drastic changes to your investment strategy or financial plan at the moment. After all, these storms might dissipate or blow off in another direction and never impact us at all. The risk of trying to predict these economic storms and dart in-between them is too high. Instead we will prepare to weather whatever comes our way, and we are confident that we will come out the other side of any turbulence in a better position because of the investment allocations and financial planning we have done together. Please be sure to call us with any questions or concerns, and rest assured that we are watching the weather.
Theodore R. Haley, CFP® AIF®