Think back to 2012 for a moment, unemployment was well over 8%, companies were announcing job cuts and losses, banks were struggling to meet their new tougher capital requirements, oil was nearly $100 a bar-rel, wages were stagnant, Greece had just received a government bailout to avoid defaulting on its debt and Europe was in a general state of decline. What if somebody predicted that in 5 short years, we would wake up to full employment, rising wages, record prof-its, low inflation, low energy prices, low interest rates, and that Europe’s stock market would be outperforming ours? You probably would have dismissed it as a pipe dream.

Regardless of whether you give the credit to Obama, Trump or neither, everyone can agree the U.S. economy is in an uptrend the likes of which we haven’t seen in decades. Anyone who wants a job can find one. Corporations are hiring left and right, while making record investments in new plants and equipment. Business and consumer confidence are both exceeding 20 year highs. After just finishing a solid 2017, the stock market is off to its best start in 54 years. With the new tax law in effect, companies are announcing employee bonuses, investments in infrastructure, stock buybacks, dividend increases and wage increases at a blistering pace. Not only is the U.S. firing on all cylinders, but much of the rest of the world is also experiencing a very rare synchronized global expan-sion.

2017 was another year in which the growth style of investing beat the value style of investing, much to our chagrin. However, both styles posted solid gains for the year, at least 50% higher than the 100-year average return for stocks. The average U.S.-stock mutual fund gained 18.3% while the average taxable bond fund gained 4.2%. The average global-stock fund did some catching up, jumping 23.8% in 2017, while still trailing the average U.S.-stock fund by nearly 2% annually on a 5-year basis.

While economic booms of this length, breadth and strength are uncommon, it is even more rare to experience these conditions with very low inflation, extremely low interest rates and historically low energy prices. This combination is almost unheard of and is what many would consider “economic nirvana”. Yet the best may still be before us. With the impact of the new tax law just beginning to be felt and with the prospect for bipartisan support of infrastructure spending on our nation’s bridges, highways and transportation hubs, considerably more upside is possi-ble. We continue to believe that it is imperative to be fully invested to the extent that your risk tolerance al-lows. Success in this type of market comes down to “time in market” rather than “timing the market”. The current bull market is in its 9th year, 4 past bull markets have lasted between 12 and 15 years. We have re-mained committed to this bull market since it’s infancy in 2008 and we still believe it may become the longest bull market in history. Buckle up and get ready for some ups and downs along the way, but we fully expect the DOW to exceed 30,000 within the next 2 years.

Two Keys for Success: Diversification and Participation

Investment styles go in and out of favor. Many studies have demonstrated that chasing last year’s popu-lar approach typically produces inferior results over long periods of time. The same is true for attempting to time the market by getting in and out. The most effective approach involves determining the amount of volatility you can stomach over the long term, which basically means determining how much exposure you are willing to have to stocks. After that, it’s all about diversification and participation. When it comes to the market, there are not many variables we get to control. Diversification and participation are two that we can. As investors we get to decide how much and what type of stock exposure (size, geography, style) we want, and we get to determine if we are going to fully participate or try to time the market.

Generally, the more time a client spends on the sidelines, the lower returns will be, so “time in market” or participation is the key. In order to stay committed, it is sometimes helpful for clients to determine if they are more comfortable with and want a bias towards a particular investment style. The growth style (buy high/sell higher) has trailed the value style (buy low/sell high) over the long term, but the last few years have favored growth. Choosing a style bias can help clients stay in the market when times get tough. We have a value bias, however we try to make sure that our portfolios have exposure to both growth and value stocks, as they each can have extended periods of strong performance at dif-ferent times in the economic cycle.

3 Tips and Reminders to Start the New Year

  1. Know the Limits: The annual 401(k) contribution limits increased in 2018. Workers under the age of 50 can now contribute $18,500 and those 50 or older can take advantage of a catch-up provision and tuck away a total of $24,500.

    Workers without 401(k)s can take full advantage of indi-vidual retirement accounts (IRA). Workers under 50 can set aside up to $5,500 this year, while those 50 and older can contribute $6,500.

  2. Get Acquainted with the Tax Code: There are many changes to the tax code. To avoid getting hurt by the new laws, it will be worth a conversation with your financial and tax team early in 2018. While it’s true that most individual tax rates are actually going down under the new system, there are also a number of key tax deductions that are no longer available this year.
  3. Consider Rebalancing Your Portfolio: In a nutshell, 2017 was a strong year for most of the stock market and not nearly as strong for money market funds and most bond investors. Portfolios that contain significant exposure to stocks could possibly hold 5%-10% more equity than the same portfolio did just one year ago. It’s a good time to review risk tolerance, financial objectives and the asset allocation.

If the portfolio is misaligned, consider rebalancing the portfolio back to the target allocation and acceptable risk levels. If you want assistance, don’t hesitate to contact us for a formal review.


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