"I don't trust the stock market". I've heard that a lot over my 33 year career. It may even be the way you're feeling right now. Did the negative double-digit returns of the S&P 500 at the beginning of the year (which was the worst January in the history of the stock market), only to be followed by a positive double-digit return since mid-February, leave you feeling the same queasiness as riding the Wildcat roller coaster, the oldest continuously operating wooden coaster, at Lake Compounce in Bristol, Connecticut? As the chart below shows the S&P 500 has a positive return in 27 of the last 36 years. Of course that means we've had nine years of negative returns during that time. The average annual return for the 36 years has been over 11%. But in order to enjoy that 11% return you must have been able to endure an average, temporary, intra- year decline of 14.2%.
The easiest call I could've made at the beginning of the year would have been to tell you to bail out when the markets were declining and sit out this widely predicted start of a painful bear market. Some analysts were talking openly about another 2008-9 drop in share prices. But now you know, since I just told you, that the average year sees the stock market decline by more than 14% between January and December.
So how do we balance the legitimate short-term fears against the long-term reality that most of us--to realize our goals of retirement or college funding--need the higher returns that long term investing has historically provided? At New England Capital we attempt to achieve this dual goal by having a longer term focus and allocating your money between equities, fixed income and money market investments.
As most of you know I'm fond of saying I need to provide you with a balanced and diversified portfolio that allows you to sleep tonight and eat tomorrow. This means the longer-term returns discussed above as well as the intra- year declines can be lessened when we invest in different asset classes such as stocks, bonds, cash accounts. Our goal is to provide the best risk-adjusted return based upon many factors including your goals, age, time frame and risk tolerance. The actual allocation we provide will depend upon whether you are looking to create wealth, preserve wealth, or efficiently distribute wealth.
Let me close with a question I hear quite often. "What’s going to happen in the future?” Although this is impossible to answer with certainty, my belief is that we always under estimate the progress that's being made because we think in a linear fashion instead of exponentially. Human progress is in our DNA. We want better for our children and grandchildren. This is a universal desire that crosses all races and nationalities. Personal development is a multi-billion dollar business. This is why we make resolutions each New Year. Self-help books, websites, and TED Talks all tell us how we can improve…improve spiritually, socially, financially, physically, as well as our relationship and our careers.
We are living in an age of such exponential change, especially in areas such as technology, communication, and medicine (both traditional as well as complimentary medicine). Self-driving cars, social media sites, and mapping the human genome were not even on our radar screen 10 years ago. I didn't use a computer when I started in this business. I've just counted 9 computers, two servers, six virtual servers, four laptops and 13 computer monitors currently being used in my office now.
It is very difficult to wrap our minds around this exponential change environment we live in today. Let me use an example from my years of being a soccer referee to explain the difference between linear and exponential growth. After calling a penalty I would need to count off 10 yards to give a distance between the spot of free kick and the defenders. I still have the ability to pace off 10 yards by taking 10 steps. This is a linear concept of distance. But to think exponentially, each step we take is twice as long as the previous one. Our first step is 1 yard the next step is two yards, and by 30 steps we will have traveled 1 billion yards or a distance equal to 26 trips around the equator.
This rapid change is very difficult for us to understand but it accurately describes the evolution of many of the technologies and medical services that we enjoy today. I don’t have to “Trust the Stock Market” to have faith in human progress. Our lifestyles, especially in the United States, have benefited tremendously by human progress. I do know that my participation in the companies run by humans that create this progress have helped me to create and preserve wealth for me and you, the clients of New England Capital.
I’m so looking forward to seeing you in the future!