January 14, 2016 Letter to Clients
As the New Year begins, I want to thank you for the trust you’ve placed in us and let you know how much we appreciate it. Rest assured, we will continue to work diligently to help protect and grow your capital throughout these turbulent times.
2015 reminded all of us that it’s not much fun to be an investor when financial markets are in turmoil, and the early days of 2016 have reinforced our belief that we’re in for another volatile year. During the first week of trading, China devalued its currency, which triggered concern among investors that the country’s economic growth might not be as strong as official reports indicated. As China’s stock markets began to fall, investors feared China’s brand new stock market circuit breakers would be triggered and prevent them from pulling assets out of the market.
This fear accelerated the market’s fall, and China’s circuit breakers did, indeed, kick in. In fact, China’s market closed twice during the week before circuit breakers were suspended on Thursday, January 7th. Once the circuit breakers were removed, markets in China settled, as did stock markets in the United States and elsewhere.
We've taken steps to protect against market volatility
The good news is that we have taken steps to position our clients’ portfolios for a volatile market environment. In general, we’ve reduced exposure to international markets and commodities while hedging portfolios to protect against downward movements in the market. Each of our clients’ portfolios is diversified and allocated with an eye toward individual risk tolerance and long-term financial goals. The bad news is, even when your portfolio is well diversified, volatility is difficult to tolerate. We would all prefer to see the value of our assets rise consistently. Unfortunately, markets and companies do not steadily increase in value over time. Their values move up and down. As a result, it’s important to remember that market downturns happen and, often, are followed by recoveries. In a 2008 article in The New York Times, Warren Buffet wrote,
"Over the long term, the stock market news will be good. In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497." 1
Stay calm, stay invested, and stay in touch
We can't change market volatility, but we can control how we respond. Sometimes, market downturns create opportunities for investors to buy low. However, a study by the St. Louis Federal Reserve found that many investors tend to do just the opposite.
"An average equity mutual fund investor tends to buy when past returns are high and sell otherwise. This is called return-chasing behavior…chasing returns caused the average U.S. mutual fund investor to miss around 2 percent return per year [from 2000-2012], which is very significant." 2
While it can be difficult to ignore media noise during periods of market volatility, headlines and market values are going to change far more often than your long-term financial objectives do. As a result, its important to stay calm, stay the course, and not allow pundits or news reports to frighten you into taking actions that may not be in your best interests. We can help. In addition to offering a disciplined investment approach, we can help by explaining what is happening in markets and how we are responding to events.
Coming soon: Our new, state-of-the-art website
We'll soon have another way to communicate with you, as well. LePage Financial will be introducing a new, state-of-the-art website that will include videos, newsletters, and additional financial and market information. We hope our new website will be the first place you turn for information when you have concerns about the market, your portfolio, or other financial matters. We’ll let you know as soon as the new site is available. In the meantime, if you would like to talk about recent events or your portfolio, give us a call. We welcome the opportunity to speak with you about anything that’s on your mind.
Sincerely,
Steven LePage
*Diversification and asset allocation strategies do not assure profit or protect against loss.
1 Buffet, Warren. Buy American. I am. The New York Times. October 16, 2008
[ http://www.nytimes.com/2008/10/17/opinion/17buffett.html?_r=0]
2 Chien, YiLi. Chasing Return Has a High Cost for Investors, Federal Reserve Bank of St. Louis. April 14, 2014 [ https://www.stlouisfed.org/On-The-Economy/2014/April/Chasing-Returns-Has-a-High-Cost-for-Investors]