Diversified and Patient (05/07/2015)

The markets can be uplifting at times and downright disappointing at other times. As long-term investors, we don’t want to look at short-term swings in the marketplace. It drives me nuts when clients tell me that they look at their accounts on a daily or even weekly basis. If you do so, you will drive yourself nuts. A recently retired client told me he was looking at his investments on a daily basis (I thought he should get a better hobby).  One day his portfolio went up and he slept like a baby.  The very next day, the portfolio went down and he couldn’t sleep. This continued, day after day. What was worse, he was driving his wife crazy with his focus on the market ups and downs. We discussed the idea of waiting until the statements arrive and reviewing where he was at that time only. He agreed. Unfortunately, his statements come in monthly! I prefer quarterly statements.

Having said all of the above, I am charged with looking at the asset allocation and the ongoing results of the investments more often.  During the past four weeks, for example, I have seen just about every asset category fall. Bonds are down, stocks are down, real estate is down, natural gas is down, and on it goes. We like to think that by using non-correlated investments some investments will be up when others are down. This is not always the case. Overall, what we need to recognize is that diversification is a method to reduce risk, not to eliminate it.  As the results of the first quarter are still being reported, it is likely that the U.S. growth rate of 0.2% will turn negative, as the negative balance of trade figures are added to the calculation. The month of April showed a marked slowing of non-farm job creation. Janet Yellen, the Federal Reserve Board Chairman, indicated that, as short-term interest rates rise, intermediate and longer-term rates would likely do the same. All of these issues point to a continuing slowing of the economy, with possible higher interest rates slowing it even more.  The good news/bad news story is that the U.S. dollar is weakening against foreign currencies. This is bad news because it reflects the world view that the U.S. economy will not be the major economic mover it has been for the past year, and foreign countries are regaining some strength in their economies. The good news is that our exports will be cheaper and this could help the economy, longer-term, to grow at a more sustained rate.

We thus have an unsettled economy, which creates volatility in the markets. We remain diversified and patient.

Ed Mallon

May 7, 2015