By: Kevin Slater
As Vicki highlights, 2018 was a tough year for investors. There is no doubt we could see additional drops in the markets in 2019 … or not. We remain committed to patiently managing diverse portfolios with a long-term focus. We are invested in the equity of companies from around the world and of varying sizes. Additionally, we hold an array of fixed income securities to provide ballast and income.
Here is why:
First, market returns are much bumpier than we like to remember.
Second, predicting where the markets are going to go and when is impossible. At best, we can guess their general long-term direction, but rarely can we guess their short-term performance except in quite extreme events (election results and federal budgets do not qualify as such). The following chart shows how returns from different asset classes vary year over year. What works one year may or may not work the next. Last year’s best performing asset class can become next year’s worst performer.
Third, if we react by selling after a “sell-off” seems to have begun, we are more likely to create more harm than good to long-term returns.
At SoundView, we weigh our allocations based on long-term projections and wait patiently. At present, we suspect there is more long-term opportunity in Emerging markets than in the U.S. based on current Price to Earnings (P/E) ratios. The chart below maps these ratios. Note higher P/E ratios suggest “expensive” stocks whereas lower P/E ratios, “less expensive” stocks.
When we might experience that out-performance is anybody’s guess.
Meanwhile, interest rates have risen while the yield curve is very flat. How much longer will the Fed raise rates? At least bond holders are earning more interest! We have invested in a balanced way across the fixed income portfolio. Like equities, fixed income returns vary by strategy and predicting next year’s single best performer is an unlikely outcome.