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Q3 2017 Quarterly Letter -Ctrl+Alt+Del Regrets

Q3 2017 Quarterly Letter -Ctrl+Alt+Del Regrets

QL 2

When asked what he would change if he had a chance to reboot his work life, Microsoft’s Bill Gates said he would change the restart command for Windows computers. Instead of requiring users to press the Control, Alt and Delete buttons all at the same time, he’d switch to a single-button operation.

Ctrl-Alt-Del Regrets? Not for Me!

Sorry, but I disagree! Maybe Gates has forgotten how long it took to reboot a Windows machine in the ’90s. I think the three-button, two-handed operation was pure genius. Why? It concretely reminded users that before you give up and pull the plug on something, it’s important to have a little patience. Taking enough time to locate the required buttons and determine where to place your hands to press them simultaneously created a sort of buffer. Computer users needed to make sure the situation was dire enough to reboot, that they saved all of their work and that starting over truly was the best course of action.

Valuations in the U.S. stock market are causing some investors to seek a similar Ctrl-Alt-Del-type option for their portfolios. They are concerned that the market can’t keep going up at the current pace and they want to move to cash or safe assets. However, I advise patience. Now is a time to pause and reflect. Ask yourself: Is the market situation dire? Did you save all of your hard work and is this the best course of action right now?

When an old Windows computer (think Windows 95) rebooted, you were out of business for a while because the reboot process took a really long time. The same could be said for today’s investments: If you take your portfolio to cash or less risky assets right now, you could significantly slow down your progress toward achieving your goals. That’s because the return on assets with less risk is very low compared to that on stocks. We need to have patience and perspective to not make rash decisions and pull out of the market just because we have not had a bear market in more than nine years.

Are we in dire market conditions?

I think not. Bull markets do not die of old age. It takes some combination of irrational exuberance, dramatic interest-rate increases and a recession to tip them over and lead to a market decline of 20% or more. We do not see these conditions in the market today. In fact, most economic indicators of global growth are accelerating rather than faltering! While stocks have certainly appreciated, this has been, and continues to be, the most-doubted bull market in history.

It’s true, too, that the Fed has begun the process of ratcheting interest rates higher. However, interest rates remain well below pre-recession levels and are still artificially low relative to inflation and the general rate of economic growth.

Perhaps the best antidote to bear-market worries is the financial health of the companies in the markets. Every quarter so far this year has registered significant growth in profitability. Companies are poised to deliver another dose of growth in earnings and investor confidence starting with earnings announcements due out later in October.

Did you save all of your work?

Planning strategies require time and investment return to show success. Roth conversions, Grantor Retained Annuity Trusts (GRATs) and various charitable and family gifting strategies, in particular, may take time before their investments and tax savings build up. Going to cash or safe investments may derail these strategies. You want to consider them very, very carefully before moving them to cash (the equivalent of rebooting your computer).

Is rebooting the best course of action? Not always!

Computers are quite different from portfolios, of course. Back in the Windows 95 days, I only had one computer, so rebooting meant I was going to be unproductive for a while. As I write this letter today on my MacBook, I also have my desktop Mac and iPhone available to me if I restart my laptop.

Today, the way our portfolios work is similar to having multiple available computers. As U.S. markets get a little too frothy, we are able to stay diversified in developed markets that are trading at better valuations, such as Europe, Japan and the U.K. We have Emerging Markets, which are trading at quite inexpensive valuations. In addition to other geographic markets, we also have alternative investments in oil and gas pipelines that offer very attractive current yields. Foreign real estate also is a great diversifier.

Having so many choices means that a complete portfolio reboot is rarely necessary.

And reboots sometimes fail

One last memory from early computing: The reboot didn’t always work. Sometimes our hard drives simply failed, or some other calamity befell our machines. A similarity in portfolios: We can’t be assured that switching to cash will always work. The biggest reason is that cash generally doesn’t give us enough return to meet our financial goals.

Plus, being in cash means we have to make even more tricky market timing calls. Since we usually can’t afford to stay in cash forever, we need to figure out when to get back into the market. As a result, the market-timing nature of cash makes it the most nerve-racking investment.

Sticking to a long-term investment policy and properly allocating your assets—regardless of what’s currently happening in the market—always tends to be a more calm experience. Being patient and focusing on your long-term goals also tends to lead to a more prosperous outcome.

Tempted to hit Ctl-Alt-Del on your investments? I hope I’ve persuaded you that it’s just not necessary. Give your Wealth Advisor or me a call first!

Best regards,

Chris Cordaro
Chief Investment Officer and Wealth Advisor

 

Important disclosure information

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