The Keys to Investment Planning in 2018

Investment Planning Amidst Cautious Optimism

By all accounts, 2017 was a year to remember.  We are appreciative that our clients continue to put faith and trust in us as we guide them through both the memorable and forgettable years. As we leave 2017 behind and start into 2018, the phrase, “cautiously optimistic” investment planning comes to mind.

The Start of 2017

We began 2017 with a seemingly expensive U.S. stock market, looming interest rate increases that had the chance to cause peril in bonds, foreign markets that had lagged for consecutive years, and the beginning of what can only be called an unorthodox Presidential Administration.  

By mid-year, we certainly saw economic growth, but headwinds were possible with a stalled legislature, a slowing economy, interest rate tightening by the Fed, and excess oil supply.

The End of 2017

So how did we end up here?  The S&P 500 Index finished 2017 gaining +21.8%.  Small-cap stocks represented by the Russell 2000 Index finished +14.7% and the international stock index EAFE increased 25%.  All the while, bonds in the U.S. and abroad finished with respectable returns in the single digits.

The investment markets tend to advance at levels to our surprise when they face a host of negative factors.   Some of these factors may be credible, while others are flimsy and over-hyped by news outlets. An environment is created where no one gets to ‘irrational’ in their ‘exuberance’.  I think policies that are favorable to economic growth were combined with low expectations to create a terrific year.

Cautiously Optimistic for 2018

And where do things stand now?  We are cautiously optimistic (“CO”).  We are ‘CO’ that the markets will continue to rise in the near term, and if/when there is a decline, we are ‘CO’ that it can be short-lived.  What is leading to our cautious optimism?  First, bonds will be challenged due to rising interest rates and a shrinking balance sheet of the Federal Reserve and other central banks.  However, we think that experienced bond managers will find opportunity for respectable returns over time.  Second, the global economy is in a synchronized upturn.  It was at this time last year that we leaned on our experience, stayed disciplined in our foreign allocation, and our clients reaped the benefits of international equity returns.  

With growth improving and widespread there is opportunity for continued gains in equities. 

Rising markets do not die of old age, but they do end, and this one will too.  I do not know (and no one does for that matter) when, but it will.  Therefore, we believe our work is not so much about what is made in one year, but what is kept over years.  In that regard, we focus on managing risks, keeping perspective, and measuring progress against personal goals, not market milestones.

Uncertainties

Because ‘cautious’ is part of our mindset, we will certainly be diversifying to reduce risk that comes with uncertainties that will be faced.  

What are these uncertainties that can bring an end to what is now the second longest market advance in the last century?  Geopolitics would certainly be top of mind.  Aggressive Federal Reserve rate hikes would be a factor.  A rise of stock market euphoria would do damage at some point showing itself in excessive valuations.  Finally, though not evident on the surface, a recession could bring about a retreat. 

Keeping the Right Focus

It is tempting to think we know where the market is headed.  Changing your investment approach based on these temptations can be counterproductive.  Instead, experience suggests keeping to a long-term strategy focused on fundamentals, wherein we diversify, rebalance when necessary, make modest tactical adjustments when prudent, and take advantage of compounding. 

I’ll end with a quote from the legendary investor Benjamin Graham,  “The best way to measure your investment success is not by whether you are beating the market but by whether you put in place a financial plan and a behavioral discipline that are likely to get you where you want to go.”

Author: David Jeter, CFP^® | Partner and Financial Advisor | Allegheny Financial Group | June 2018

Allegheny Financial Group is a Registered Investment Advisor. Securities offered through Allegheny Investments, LTD, a registered Broker/Dealer. Member FINRA/SIPC.