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Wealth & Well-Being

Summary of Northstar's Investment Call on 2/4/2014

Weston Wellington, Vice President at Dimensional Fund Advisors gave a great talk regarding 2013 predictions, what actually happened and some sage advice to take into 2014.

2013 was one of the best performing years on record for equity markets, but the constant stream of bad news kept many investors from participating in the upside.  It was a year for constant worry, from the largest municipal bankruptcy in Detroit to a government shutdown.

"We are thinking about the problem in the wrong way", stated Weston.  There are always things to worry about in the world and there are always things to be optimistic about.   You never know which factors will have the greatest impact and they are often already reflected in the prices of securities anyway.

As humans we feel like we have the information available to make accurate market predictions, but we don't.  In reference to Barron's 2013 Roundtable, where a group of investment experts make their economic predictions for the coming year, many of them thought there would be a crash, and one third of them had gold as one of their top picks, which was one of the worst-performing assets classes of the year.

He stated that risk and return are related and that is how capital markets work.  Avoiding risk means avoiding return. The world is an uncertain place and the best expectation that we can have over any time is that riskier assets will give higher returns than safer assets.  If you invest in a business, you should expect to earn a higher return than if you loaned your money to a bank or business.   In the last 10 years, the overall stock market returned an average of 7.9% a year, and 1-3 year Treasury notes returned 2.6% annually on average. There have been plenty of bumps along the way- including a world financial crisis, US credit rating cut, Flash Crash of the Dow- but we received a higher return for holding equities because of the risk we are taking on.

There are always positive and negative reasons to own stocks.  If you are asking what to do differently for 2014, Weston suggested likely nothing, unless you have had a life change that would alter your risk tolerance. If you are worried that interest rates are going to increase, you can always worry about that; and even if they do rise, it is not necessarily a predictor of lower returns. Rising interest rates are not always bad for stocks. Last year rates rose about 1%, and stocks had their best year since 1997.

He compared a market downturn to a drought. If you own equities long enough, you are going to experience one, and you won't know when it is coming or how long it will last, said Wellington.  You just need to be prepared so that you have what you need to get through it. Volatility is the nature of investing.

Another way to think about the stock market is to consider it more like a private real estate investment.  We don't value this type of investment every day.  He recommends thinking of your equities as owning a small piece of the world's businesses. You participate in their profits, get paid dividends. That is how wealth is built.  It is meant to be a long-term relationship.

He talked about the biggest challenge (and we think the biggest opportunity) for an investor is choosing the right asset allocation (mix of equities and fixed income). Everyone's allocation is unique based on their goals and appetite for risk. Think of it like going to a grocery store and filling your cart with the different things that you need for you and your family. Your cart will look very different from your neighbor's cart.  At Northstar, we work with each client to determine the appropriate asset allocation given their goals and tolerance for risk.

Ultimately, we cannot control market performance. At Northstar, being prepared means developing a strategic asset allocation with the proper amount of risk exposure to all the global markets. Our focus is on helping you stay in your seat to enjoy the long term performance that investing in great companies has always provided.

If you have any questions, or would simply like to discuss this topic further, feel free to reach us at 603.458.2776.

Written by Northstar Financial Planning

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