Searching for Smooth Air
I thought the best April Fool’s Joke that I heard last week was that Thursday was the end of the first quarter of 2016…..Only 3 months? Impossible – Not falling for it!
With the intensity of the market’s traversing, the vexing amount of volatility and the emotional expenditure, we must have just finished an entire year, right?!
But as you know, it was no joke.
Investors were stunned as the quarter kicked- off with headlines like this on January 7th:
“Dow has worst four-day start to a year on record,” from CNN Money.1
And dismayed by ones like this on February 11th:
“Dow closes at 2-year low, dogged by global market turmoil,” from CBS MarketWatch 2
So, it seemed unlikely to be read something like this on March 1st:
“Dow soars nearly 350 in ‘Super Tuesday’ for stocks,” from CNN Money. 3
But downright inspiring to catch this going into the quarter’s final week:
“Dow Average Caps Longest Rally Since October as Treasuries Slip,” from Bloomberg. 4
For those of you that are more visually inclined, see below for a graph of the S&P 500 for the first quarter of 2016 depicting a 10.5% drop followed by a 12.5% rally to end the quarter positively by just over 1%. What a wild ride!
And for any millennial readers, I think this said it all in Q1-16: DUCWIM?
I did some traveling this first quarter and it was fair to compare the weather patterns of the US with that of its capital markets – just ask any Floridian who took cover from a tornado in January! Or a Midwesterner with a sunburn from an 80 degree day in February!?
I have never been afraid to fly – thankfully not afflicted with an anxiety experienced by many, including a couple of my children.
My wife and I have tried all kinds of pacifying techniques over the years but I’ll never forget how on one family trip my father-in-law attempted to calm my youngest daughter. As we sat on a stormy runway he assured her: “the plane doesn’t know it’s raining.”
Perhaps more confused than calmed, her consternation overtook her concern as we went safely up and away.
And then it struck me: the brilliance in that message had little to do with air travel and much to do with perspective. It was equal parts tenacity and tendering. And…..it was a fantastic corollary to investing.
Investing money should be considered a long flight:
As you consider the objectives of your portfolio, there are 3 specific components that are incorporated: growth, income and principal protection.
The weighting of each component is predicated on many things – most of which are personal.
The market turbulence that can impact a portfolio often leads investors to question their objectives.
That can be a healthy exercise, but only insomuch as investors are willing to modify their ultimate destination and that they understand the consequences.
The first quarter of this year is a great example of the elevation and dissipation of turbulence over a very short period of time. Making changes to combat the present conditions can be defeatist and may transform the trajectory toward your long-term goals.
Turbulence tends to give way to smoother air but the timing of its arrival can be ambiguous. Feeling confident that your risk is properly compartmentalized is key to navigating market storms.
In managing money, this is known as adhering to your strategic asset allocation.
Careful navigation can be comforting:
There is one often overused aviation analogy in investing – that of putting your portfolio on “auto-pilot”.
It is well-meaning from the standpoint of resisting the urge to micro-manage your investments and to incorporate the aforementioned long flight perspective. However, flight paths may necessitate modification if certain routes become congested and/or your priorities change.
The identification of the highest expected-return alternatives within each area of compartmentalization (growth, in-come & protection) is a dynamic process.
The vector of a portfolio has coordinates dictated by prevailing conditions. As those conditions shift (for example, as interest rates go up or down) often an alteration of the coordinates, via active management, is necessary to stay on course.
This is critically important at inflection points along a portfolio’s life cycle – starting a new job, selling a company or retiring to name a few.
Much as aircrafts rely upon sophisticated avionic technology, the real-time feedback – or message of the markets – can be interpreted by active management. Ideally, this can provide contrarian entry and exit points for classes of assets distorted by short-term volatility. Several such points were readily available this first quarter of 2016.
Just think how discomforting it would be to hear a pilot over the intercom inform you that, “we are going to land this puppy on auto-pilot. Hang on!”
In managing money, this is known as tactically adjusting your asset allocation.
If the first quarter of this year is a harbinger of things to come, then keeping our proverbial seatbelts fastened will make sense.
Reinforcing the consistency of your current portfolio with your long-term objectives is smart to do with regularity – not just when markets are choppy.
And much like the plane that doesn’t know when that it’s raining, so too do we intend to persevere in the face of stormy market weather – tracking toward our long-term goals.
We look forward to getting together soon and thank you for your confidence in Kavar Capital.
The views expressed herein are those of Douglas Ciocca on April 4, 2016 and are subject to change at any time based on market or other conditions, as are statements of financial market trends, which are based on current market conditions. This infor-mation is provided as a service to clients and friends of Kavar Capital Partners, LLC solely for their own use and information. The information provided is for general informational purposes only and should not be considered an individualized recommendation of any particular security, strategy or investment product, and should not be construed as, investment, legal or tax advice. Past performance does not ensure future results. Kavar Capital Partners, LLC makes no warranties with regard to the information or results obtained by its use and disclaims any liability arising out of your use of, or reliance on, the information. The information is subject to change and, although based on information that Kavar Capital Partners, LLC considers reliable, it is not guaranteed as to accuracy or completeness. This information may become outdated and we are not obligated to update any information or opinions contained herein. Articles may not necessarily reflect the investment position or the strategies of our firm.