2016 First Quarter
I have always thought that it was fascinating to watch the stock market unfold throughout the day and then throughout the year. As you all know by now, no one knows what will happen with the market from one day to the next. I have often compared it to watching the drama of a baseball game. You have a bit of good news for the day: Your ace pitcher is on the mound and does well in the first seven innings and his team supports him with a several run lead. But then he hits the 120 pitch count and his arm is pretty tired. He starts missing the plate. Eventually, he gives up what will be the game tying run in the top of the eighth. The stock market can create similar drama: You think you might have a piece of good economic news that will help support stock prices, but then with an hour to go in the trading day the market tips the other direction and heads south for no reason except that there might be some "profit taking" in the final minutes of trading.
The first quarter of 2016 had all the excitement of the first few innings of a baseball game. If you were to chart the S&P 500 over the first quarter of 2016, it would look like the letter "W." The general theme was that the Chinese economy was slowing - perhaps faster than what the Chinese leadership had been portraying and that this slowdown could be an early indicator that all is not well with the global economy. A slowing worldwide economy means the demand for oil also declines. Thus the price of oil fell and took the stock market with it. As oil recovered, the stock market did as well and we rallied into March 31st. Most of you will be either breakeven or slightly positive for the first quarter. If you took a three month vacation where you were not connected to the news, you would have thought it was a boring quarter. Nothing could be further from the truth.
During markets like these, I will take a look at each the securities within your portfolios and ask myself, "Is that a fund I would buy today?" If not, I will take advantage of the market drop to sell the security at a minimal taxable gain (or possibly loss) and hope that the fund I am investing in will rise faster once the market recovers. I have every intention of holding the replacement security for 10 years or more. Over this past decade, you have seen your portfolio move closer to indexed securities and managed funds with lower expense ratios as they have become available via their "institutional" share classes. While we cannot control the return the funds provide us, we can control the fee we are paying for their management. My 60% stock and 40% fixed income model portfolio's average expense ratio comes in at 0.45% or 45 basis points. I believe this ratio is pretty low, but I am always looking for opportunities to drive it even lower. Overall portfolio performance, regardless of fees, is always my primary goal however.
Expect more volatility through the rest of the year. Should our ace go down with an injury, keep your eye on what many analysts are expecting out of stocks over the next 10 years: an average annual return of 6-9%.