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2015 may be remembered as the year Stocks, Bonds and Cash largely went nowhere. The major asset class results: Stocks: the benchmark S&P 500 index achieved a total return of 1.38%.1 Interestingly on 01/02/15 the index opened at 2,058.90 and closed 12/31/15 down at 2,043.94, dividends made the total return positive. Bonds: Barclays US Aggregate Index 0.55%1 and Cash: 0.48%.1 Oil prices, as measured by the NYMEX Crude Index, were down 30% during the 12 month period.2 The broader market¿s technology heavy NASDAQ Composite index's total return was 5.73%1 for 2015 and the measure of the world markets, the MSCI All Country World ex USA Index declined 5.66%.1 2015 was truly an unusual year where most asset classes you could have invested in returned very little. As fixed income guru Jeffrey Gundlach recently stated, "Last year was one of the worst years for the 'best return" ever', it was a hard time making money last year,- noting that 2015 was the worst year since 1937 for the "best" asset an investor could have owned.3 And 2015 was the worst year for asset allocation investing since 1937.4 However, asset allocation investing, which likely resulted in a negative total return during 2015, remains a prudent approach because, despite an abundance of forecasts and predictions, no one has a crystal ball or truly knows which assets will outperform during a given period of time. Remember, investing requires commitment for a long period of time, the rest of your life, and during periods like these we are reminded of something we wrote about in our 2009 letter, 'no one invests successfully without a year or two of nasty news'. It can be unsettling to see the stock market go through big bouts of volatility like it did last year and end basically flat. Combine that result with January 2016's negative return and it may cause investors to think that now could be an opportunity to cash out of the market and get back in after the next sell-off occurs. Unfortunately, markets are not predictable. And while it doesn't feel good to lose money when the market declines, market timing is not a consistent strategy. Timeless lessons of successful investing points to staying invested, avoid trying to time the market, and diversify broadly. Even though markets may be volatile, history has shown it is more prudent to think long-term, and to maintain a diversified portfolio of investments.
More importantly, 2015's market performance may be signalling investors to think in terms of realizing lower than historical average returns for the next several years. For investors, this is a very important concept to embrace and consider. One can invest in a U.S. Government guaranteed investment (the 10-year U.S. Treasury Bond) and earn a 10-year fixed interest rate of 1.92%5 currently (2.27% on 12/31/15). For an investor to earn more than the US Government guaranteed Treasury Bond, one must risk their investment principal in fluctuating value (gain or loss) investments such as stock, real estate or commodity market based assets. For example, the Market Risk Premium, i.e. reward, over time, for stock market based assets typically results in realizing a margin (reward) over the U.S. Treasury Bond yield. For example, the typical risk reward formula could be the 10-year Treasury Bond yield of 2.0% + risk reward margin of 4.0%, equaling a 6.0% in total annual return result over the same 10 year period. While the 10-year total annual return of 6.0% (for a 100% stock allocation, which no prudent investor should have) is below the historical average, this concept should be included in present day investor forecasting and be embraced as a future expectation for risk based asset returns. If you are depending on future investment return averages greater than the formula suggests, you may be disappointed.
Our investing outlook is we are likely to experience more of the same for 2016. With a difficult start, it is hard right now to imagine a reasonable investing outlook for 2016. It is an election year and earnings forecasts are pointing to moderate increases in the S&P 500's earnings. History has shown that stock market declines and volatility are a natural part of investing. While declines have varied in intensity and frequency, they have been regular events. It may also be reassuring to know that the market has always recovered from declines. Volatility is not a recent phenomenon. Investors can expect the market to experience significant corrections with regularity. Over the last three decades corrections have averaged approximately 14%.6 History has shown that those who chose to stay the course, and remain invested, were rewarded for their patience more often than not. We suggest a prudent approach is to think long-term and to keep a steady hand in your investments.
Although past results cannot guarantee future results, remembering that downturns have been temporary may help calm any fears that enter your thinking. And for those that believe they may be able to outguess the investment markets direction, we remind you of a quote from one of one of the more successful investors of our time, Warren Buffett, "The market is the most efficient mechanism anywhere in the world for transferring wealth from impatient people to patient people."
. Sincerely, Karl P. Willard, CFP® Guy H. Blakey, CFP®
1 Source: American Funds and WSJ Markets 6 month US T-BILL yield 12/31/15
2 Source: WSJ 12/31/15 Article Titled "U.S. Oil Prices End 2015 Down 30% for the Year"
3 Source: Thinkadvisor.com 1/13/16 article titled "Gundlach: Why Q1 Could Be 'Really Ugly'"
4 Source: Bloomberg Business 12/28/16 article titled "The Year Nothing Worked: Stocks, Bonds, Cash Go Nowhere "
5 Source: WSJ Markets on 01/29/16 6 First Trust Advisors L.P., Bloomberg
6 Source: First Trust Advisos, LP, Bloomberg