client letterIn my inaugural annual client letter in January of 2018, I expressed concern about how bullish and less volatile the market had become. That letter was a reminder that volatility is a reality and the absence of volatility (that we had been enjoying through most of 2016 and all of 2017) was the anomaly.

Right after the letter hit the mailbox, the week of January 22nd, volatility returned and has been our investing partner ever since. Now that things are back to normal and markets have started both zigging AND zagging, a new (old) thought has returned. There is nothing wrong with volatility, despite what media pundits want to tell you.

Equity volatility is the only way to get the equity returns that help us reach our long-term goals. We embrace ‘appropriate’ volatility that fits with your plan. Without volatility, returns are significantly lower (think CDs and savings accounts).

So, what is normal volatility? Historically, average peak-to-trough declines take the following shape:

  • Every year – about 14%
  • Every 3 years – a 20% event
  • Every 5-6 years – a big 33%+ decline

And yet, even without counting dividends and their reinvestment, annual returns of the S&P have been positive for 29 out of the last 39 years. Furthermore, the Index has gone from 106 at the beginning of 1980 to 2,510 at the end of 2018.

Just as I did in early 2017, it is worth restating our overall philosophy of financial planning and investment advice.


Most successful investing is goal-focused and plan-driven, while most failed investing is market-focused and performance driven. In other words, I believe that truly successful investors act mindfully according to their specific plan and most failed investors are continually reacting to economic and market “news.”

Our clients create multi-decade (or multi-generational!) financial plans for the purpose of funding educations, retirements, and legacies. These plans are designed to be viable far beyond the current news cycle. My hope is that the nonstop noise of the financial media is reduced to a soft background hum in your life. While you and I can’t help but hear that hum, we should make no attempt to infer an investment policy from it.

We know what we know. We don’t know what we don’t know. The future is impossible to predict, so we won’t attempt to forecast the economy or time the markets. No one can consistently project the future relative performance of specific investments based on past performance, and we refuse to try. In a nutshell, we are planners not prognosticators. We believe our highest value to you is our planning and behavioral coaching designed to help you temper your reaction to the “noise.”

The essential principles of portfolio management we follow are simple:

  • The short-term performance of your portfolio relative to a benchmark is irrelevant to your long-term financial success.
  • The only benchmark that matters is whether you are on track to accomplish your stated financial goals in your financial plan.
  • Risk should be measured as the probability that you won’t achieve those financial goals.
  • The exclusive objective of investing should be to minimize that risk to the extent possible.

Our essential portfolio practices are simpler still:

  1. Asset Allocation determined by your financial plan.
  2. Broad Diversification
  3. Long-Term Focus on:
    1. S. & Global Equities
    2. Seeking Value
    3. Profitable Companies
  4. Rebalancing

Once a client family has worked with our team to put a long-term plan in place and funded that plan with the investments that seem historically best suited to achieving their financial goals, we very rarely recommend changing the portfolio other than to rebalance. In brief, our principle is this: if your goals haven’t changed, don’t change the portfolio. Our belief is that the more often people change their portfolios, the more opportunity there is for those changes to become driven by fear and greed relative to daily headlines. We mustn’t fall into this trap.

Temporary market declines have historically not translated into a permanent loss of capital. The most effective antidote to this normal market volatility appears to be TIME. I can’t say it will always work out this way, but so far it has. We heed the words of investor and philanthropist John Templeton: “The four most dangerous words in investing are ‘It’s different this time.’

The very nature of investing requires practicing rationality under uncertainty. We’ll never have all the information we’d like about what lies just around the bend. We are investing in and for an unknowable future. Therefore, we adhere to investment principles that have thus far yielded the most favorable long-term results over time: planning, rational optimism, patience, and discipline.


Two thousand eighteen was perhaps the strangest year I’ve experienced in my career as a financial advisor. Economically speaking, 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 stumbled and fell.

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 finally 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 me this sums up the entire remarkable year—for the first time in American history, the number of open job listings exceeded the number of people seeking employment.

Earnings of the S&P 500 companies, paced by robust GDP growth and, yes, massive corporate tax reform, leaped upward by more than 20%. Cash dividends set a new record; indeed total cash returned to shareholders from dividends and share repurchases since the trough of the Great Panic reached $7 trillion.

But the equity market had other things on its mind. 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 closing 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. 2018 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 imponderable as the year turns is trade policy, which in the larger sense is an inquiry into the mind of President Trump. Good luck. His tariff blustering creates gratuitous distractions (which is perhaps the point) and introduces ugly uncertainties that markets and consumers dislike.

Trump’s incomprehensible nature and a short list of other uncertainties—perhaps chief among them Fed policy and an aging expansion—were weighing heavily on investor psychology as the year drew to a close. For whatever it may be worth, my 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 Buffet, wrote in his 1994 shareholder letter, “Fear is the foe of the faddist, but the friend of the fundamentalist.”