Writing Your Investment Plan

July 5, 2019 – Creating a written plan has been credited time after time as the key to success in achieving any goal. Investing is no different. Investors of all types—individuals to professional money managers—need a written investment goal and strategy to achieve that goal. In an unpredictable market environment, investors can be easily tempted to make short-term decision as an emotional reaction to current conditions or in an attempt to out-guess the near-term direction of markets or specific investments. A written investment plan is the framework for the discipline crucial to long-term success.

When you have a written investment policy, you know your goal and your timeline. You will have a map of what it will required in money, time, and investment earnings to reach your objective. You will also have a reminder why you have made specific investments, the role each plays in your portfolio, and the risk involved. You can easily measure whether you are on track and what changes need to be made to stay on track. An investment plan gives you the confidence to stick with your investment strategy, regardless of temporary market losses or new highs.

In the recent quarter, nearly every asset class climbed higher. This quarter concluded what has been the strongest first half of the year for the S&P 500 index since 1997. The one-year return on the S&P 500 ending June 30^th was approximately 10%, a predictable average return for stocks. While recent returns have been very good, the market’s journey over the past 12 months has been anything but predictable. U.S. stocks reached an all-time high in September, declined over 18% by Christmas Eve, and then rebounded 23% in the following six months. Bonds have had ups and downs as well with interest rate yield on the 10-year Treasury note above 3% last summer and recently falling below 2%.

Looking at the year to date, the single biggest influence on both stocks and bonds has been interest rates. The decline in longer-term rates, which boosted bond prices, is a result of low inflation readings and slowing economic growth. The stock rally that began in January has been extended by the Federal Reserve’s policy reversal. Over the past six months, the Federal Reserve has shifted from a short-term rate increase in December to its current inclination toward a rate cut.

We see the current U.S. stock market as slightly over valued. This is not at all uncommon and alone does not indicate a market decline is near. In fact, we continue to view U.S. stocks as the most attractive major asset class with the two biggest factors, interest rates and earnings growth, still supportive.

At least as important to the psychology of the market are trade negotiations with China. While not having a significant impact on economic and earnings data yet, the headlines have an influence on the day to day direction of the markets. The longer the uncertainty continues, the larger the impact will become.

In international markets there remains concerns over slowing global economic growth. Foreign central banks have indicated they will take steps to boost growth by lowering interest rates, some of which are already negative. Despite these headwinds, foreign stocks have made significant gains in recent months. While more cautious and selective, we maintain an allocation to these markets.

The outlook for bonds is uncertain. Concern over slowing economic growth, along with low inflation, have contributed to a rise in bond prices as interest rates fall. The 10-year Treasury ended the quarter with a yield of 2.0%, down 0.69% for 2019, while the 2-year Treasury yields 1.74% and the 3-month Treasury 2.1%. Evidenced by these yields, investors are not being rewarded for the added risk of longer-term bonds compared to short-term bonds. Similarly, accepting additional credit risk does not add proportionate return. Credit spreads, the premium in interest earned by lower credit quality bonds, are much lower than average. We continue to use a conservative approach, monitoring interest rate risk and favoring shorter maturities and higher credit quality. When possible, we build core portfolios of individual municipal or taxable bonds and supplement with small allocations to specialty bond funds.

We diversify portfolios by including small positions in real estate and broad commodity indexes. Commodity indexes, as usual, were influenced by the decline in the price of oil, while real estate continued to benefit from a demand for income producing investment alternatives in this low-rate environment.

Although we provide an overview of many areas of the market, our focus when managing your portfolio is on your personal goal and an individualized strategy to reach that goal. We welcome your feedback and questions.