Make no mistake about it: 2017 was one of the hardest years for an investment professional.
Yes, you read that right. One of the hardest years.
The LPL Advisors at SRQ Wealth are legal fiduciaries: we are legally required to act in our clients’ best interests at all times. And one of the most important roles of a fiduciary who manages money for clients is to manage risk. If you can manage risk, then clients typically have better outcomes - especially when they are retired and dependent on their portfolios for some/most of their retirement income. As we often say at SRQ Wealth, clients don’t often come to us “to get rich.” For the most part, they are rich - by many measures (and it’s all relative). They come to SRQ Wealth “to keep from being poor.”
Ask any self-made millionaire if they remember sitting at the kitchen table 20-30 years ago worrying about whether or not they could make the house payment that month and most will give you a resounding “yes!” Now that they have retired, they never want to go back to that “kitchen table” moment again.
It seems like any number of headlines this year should have created severe volatility in the stock markets. Even those “really smart” people in the business of making such predictions believed that would be the case in 2017. For example, a top stock market strategist at Goldman Sachs predicted a 1-2% return from mid-2016 through mid-2017. Like many professional predictions, that just didn’t hold to be true. Instead, most “buy and hold” investors this past year have enjoyed one of the most peaceful environments for equity returns in history. That doesn't, however, mean that equity risk was eradicated - just temporarily reduced.
We all know volatility in the markets is going to make a “comeback” at some point. It has to. Markets, like everything in life, go through cycles. The problem, of course, is knowing when and where that “switch” will be “flipped.” And because no one can really know when that exact moment will occur until long after it already has, we must manage risk continuously.
Because volatility was expected to return and didn’t, 2017 became one of the hardest markets in which to manage risk, and therefore, to manage money. Risk reduction historically translates into return reduction, which is definitely what occurred for those investors who weren’t “all in” from January 1, 2017. Keeping some amount on money on the sidelines waiting for a pullback opportunity to invest in 2017 (or diversified into other asset classes) went un-rewarded. Being prudent in managing portfolio risk this way looks smart in most years. In 2017, it didn’t. With the S&P 500 hovering around 2,680 as I write this in late December, the market has had a return close to 20%.
While managing equity risk is important, we can’t lose sight of other risks; namely, inflation risk.
Inflation, measured by the Consumer Price Index (CPI), has increased steadily this year. The CPI-U (U for urban) has grown by over 2% this year. Another measure, CPI-E (E for elderly) is a measure for the costs associated with people over age 62. While that hardly seems “elderly,” the fact is that healthcare costs are disproportionally higher for this population and consequently, their overall costs increase faster than CPI would you lead you to believe.
Did you realize that for a 62 year old married couple (non-smoking), one of them has a 50/50 chance of living 30 more years? That’s just the average. The average - if you have medical care, play pickleball and go to see a show at the Van Wezel Performing Arts Center in Sarasota - is higher. It might be 35 years. If your income is $100,000 at age 62, you’ll need $281,000 in 35 years to buy the same medical care, play the same amount of pickleball, and go to the same show at the Van Wezel. In that case, putting all your money in bonds might just be your biggest risk. With inflation rising and bonds struggling, 2017 has been a tough year for managing those risks as well.
So which risk do we have to manage? The answer, of course, is both. In a year where some investors think a 5% return is sufficient, and others think they should own some high-flying investments, balancing return and risk successfully is a skill that takes years of experience, lots of research (and studying the history of markets), and a solid dose of common sense - when markets don’t seem to have any.
At SRQ Wealth, our team of experienced professionals work diligently day in an day out to help clients work toward their goals. For some, that may mean being more philanthropic in their community, and for others it may mean an extended vacation halfway around the world. For all of them, it means never having to sit at the kitchen table worrying about making the next house payment. That’s why we will continue to manage risk - so they don’t have to.
From your friends at SRQ Wealth, we hope you have a happy, healthy and safe 2018.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.