If you are like most people, you have 75% or more of your stock market investment in US equities. The truth is, it’s not just the lay investors that are subject to this “home country bias.” Most financial advisors and money managers are equally prone to this bias. With the US accounting for only around 50% of global output and at historically high prices, a diversified portfolio should consist of a much greater allocation to foreign stocks.
A business' intrinsic value fluctuates very little. Yet, the price that the ever-moody "Mr. Market" will pay at any given time can fluctuate dramatically based on outside economic and political forces.
At Pilot Wealth, we feel no need to explain it, no need to tell a story. Instead, we recognize volatility happens and we welcome it.
For the last 7 years the vast majority of economists and analysts alike have incorrectly forecasted rising interest rates and the possibility of rampant, out of control inflation. Recently, however, these same soothsayers have flip-flopped and said that they now believe that interest rates will likely stay lower for longer.
A sideways moving market, as we have seen recently, requires a different mindset to navigate. Indeed global developed markets have been flat for a couple years now, emerging markets have been flat for 10 years, and US Small Cap stocks have had zero return since late 2013. Most Wall Street sources have described it as, “The most hated bull market ever.” The following charts have us asking ourselves, is it possible the bull market ended and no one noticed yet?
We just finished hosting a few open houses for friends of the firm, and whether it was one too many glasses of wine or the volatility we saw in the first quarter, I think we stumbled on an interesting topic. Truth be told, we are a little late publishing this newsletter. In spite of some volatility in the first two months of the year, not much has changed. Thus, at the risk of sounding like a broken record, we wanted to revisit a discussion (reference the earlier newsletter) regarding the emotion investors experience during market volatility.
As of this writing at the end of January 2016, the markets have been quite volatile. We have had a few conversations over the last couple years with clients wondering why we were so conservative. A few actually pointed to other investors who were earning a more substantial return, while their returns were more subdued. It is amazing how quickly the narrative in the market has changed from momentum-based risk taking to capital preservation.
As we are in the midst of a major correction in several asset classes (emerging markets) and one entire sector (energy), we thought it appropriate to revisit the principles of how we invest and in a manner, remind ourselves of what we should be paying attention to.
For those that have grown up in the Pacific Northwest, the story of the most famous suspension bridge to be built, and subsequently destroyed, in our own backyard is well known. For the rest of the world the Tacoma Narrows Bridge, more commonly known as Galloping Gertie, is no more than a footnote on a study of failure analysis for a university level structural engineering class.
Along with the sinking of the Titanic, the Tacoma Narrows bridge collapse was a sobering reminder of the devastating cost of hubris.