Stock markets in the U.S. and abroad continued an upward trend during the third quarter. Natural disasters, domestic political conflicts and international tensions were unable to derail the second longest running bull market in history. While the market continued to favor growth stocks over value stocks, the average diversified U.S. stock fund advanced +4.20%, while International stocks (MSCI EAFE) gained +5.47%. Investors correctly focused on improving strength in the global economy and rising corporate profits. Recently, the U.S. Commerce Department announced that Gross Domestic Product (GDP), the broadest measure of goods and services produced in the U.S., rose 3% for the quarter, which followed a 3.1% increase in the spring. Though not yet a boom, this did mark the FIRST time in 3 years the economy has strung together back-to-back quarters of 3%+ growth. Several other economic indicators turned in strong September readings, signaling accelerating growth. The unemployment rate declined to 4.2%, average hourly earnings rose, while inflation and interest rates remained low.

It was a robust quarter for international stocks as well. The global economic and earnings picture continued to brighten. The International Monetary Fund recently revised its forecasts upward for global growth in 2017 and 2018. Global equities have benefited from several trends including the weakening U.S. Dollar relative to our major trading partners. This has also benefitted many large U.S. firms that depend on exports for growth and a “cheap dollar” which has made their exports more attractive. Some international markets appear inexpensive and have not priced in expected earnings improvements. The global economic advance has now expanded to include every country in the MSCI developed and emerging markets indexes. The strength of the global economy should not be ignored. Global expansion this broad has not been seen since the 2004-2007 period. This, coupled with low inflation is a rare and powerful combination. As long as this trend continues, the overall investing landscape should remain supportive.

The U.S. bond market has performed well given that the Federal Reserve has raised interest rates twice this year and the consensus is it will raise rates again in December. The Bloomberg Barclays U.S. Aggregate Bond Index returned +0.85% for the quarter. We continue to approach the bond market with prudent caution, focusing on return OF capital, instead of return ON capital. Bond purchases must be carefully chosen as most high quality bonds offer too little yield and most high yield bonds are too expensive for the additional risk they present. We have a demonstrated skill in the area of selecting and managing high quality, individual bond portfolios. If this is an area of interest for you, please let us know.

A Goal Without A Plan Is Just A Daydream

Pardon the above simplification of retirement planning, it’s just that clients often speak of goals but they have not taken the time to develop a written plan. We are here to help in this area. Developing a written financial plan is one of the pillars of building wealth wisely. As we guide clients through the process, we find there are only five inputs to retirement planning (1) savings rate (2) rate of return on those savings (3) retirement date (4) withdrawal rate (aka spending), and (5) life expectancy. The savings rate, retirement date, and withdrawals are entirely predictable and within a client’s control. Unfortunately, we have less control over our returns and life expectancy. Some people try to make better lifestyle choices like eating right and exercising to improve life expectancy. Some try to optimize their portfolios by reducing investment expenses or seeking out higher-performing investment opportunities. These efforts can have mixed results. However, the bottom line is these inputs are mostly out of our control.

We have done planning work with many families, and what we have found is that if we are willing to acknowledge what we can and cannot control, within our retirement strategy, it strangely leads to more comfort with the plan. The increased peace of mind comes from more calibrated assumptions regarding our retirement planning. For example, through the process of developing a retirement plan, we often discover even a reduced long-term assumed rate of return achieves our retirement income goals. This enables families to discuss the benefits of reducing portfolio risk without compromising their financial goals.

We’ve read countless investing articles and listened to financial gurus over the last couple of years apply the same pessimistic four-part template to this market cycle.

  1. Stock market volatility remains too low which could be signaling an upcoming correction.
  2. Major stock markets around the world continually shrug off political and economic risks.
  3. Valuation of U.S. stocks remains expensive based on historical measures and relative to international stocks.
  4. Nasty twitter exchanges between political elites, gridlock preventing legislation progress in Washington and saber rattling with North Korea and Iran are being ignored by investors.

For the last several years, investors have had very little faith in this bull market. Markets have risen in spite of the skepticism. The pessimist’s story remains the same: the market is expensive and therefore risk is high. But should we expect a “cheap” stock market eight years into an economic expansion with historically low interest rates? We don’t think that is realistic. The market is fairly priced given the current positive economic environment, which looks to be fairly sustainable.

The key to long term success is not timing the market, but “time in” the market. With a solid written financial plan complete with a retirement date, a retirement amount, a retirement income level and monthly/annual savings goals, investors are better equipped to stay calm and ride out temporary corrections. Allocating a prudent amount of long-term capital to a diversified portfolio of stocks and rebalancing your portfolio annually makes sense. Owning some bonds makes sense for most people as well, as does investing new money on a regular basis according to your plan in order to achieve your goals. Current market conditions and market assumptions moving forward should inform your investment plans and be calibrated to your financial goals. We can help you to develop a solid plan, just let us know if you would like to go through the process. Now, more than ever, it is important to have a written plan, and not just a goal in mind.

The key to long term success is not timing the market, but “time in” the market. With a solid written financial plan complete with a retirement date, a retirement amount, a retirement income level and monthly/annual savings goals, investors are better equipped to stay calm and ride out temporary corrections. Allocating a prudent amount of long-term capital to a diversified portfolio of stocks and rebalancing your portfolio annually makes sense. Owning some bonds makes sense for most people as well, as does investing new money on a regular basis according to your plan in order to achieve your goals. Current market conditions and market assumptions moving forward should inform your investment plans and be calibrated to your financial goals. We can help you to develop a solid plan, just let us know if you would like to go through the process. Now, more than ever, it is important to have a written plan, and not just a goal in mind.

 

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