2015 was a very peculiar year for two reasons. First, returns across most major asset classes were flat. Stocks went on a roller coaster ride with the China market volatility as the S&P 500 returned +1.38%, the Dow Jones +0.21%, and the MSCI World excluding US Index returned -5.66%. Bonds did very little to add to returns as investors were gun-shy with the high-yield sector going through a sell-off, and buyers not willing to commit with the looming Fed rate hikes and its uncertainty with regards to timing and magnitude. Within commodities, crude oil prices dropped into the $30 dollar per barrel range--the first time since 2003. Second, positive returns in the stock market were limited to a smaller-than-average number of companies. Most stocks in the S&P 500 did not make money. According to Oakmark, if you owned the smaller 490 stocks of the S&P 500, your return would have been -3% (excluding dividends). Whereas if you owned the largest 10 companies of the year, the return was approximately 20%. Though diversification and asset allocation was not fruitful this year, it was an aberration--lest not steer you off course from your long-term plan.
Patience and Investing
Markets have provided long-term growth to investors that have some appetite for risk and patience. It is when one of the two (or both) are missing or wane, that irrational decisions are made. In most years since the financial crisis of 2008, investors were rewarded with strong returns and low magnitudes of stock price movement. Perhaps it was this euphoric return environment and the daily stock ticker-tape parade that led to a decline in investor patience. It feels as if investors have grown accustomed to immediate returns on their stock holdings, and are enamored by being able to see the price of a stock at any given second. Gains won’t come in a smooth and steady manner all the time—rather it is the contrary. There will be market disruptions, there will be days of consecutive losses, there will be levels of risk. Patience will help portfolios get through such periods and participate in the long-term gains that the S&P 500 has provided over time.
Why we invest
The Berkshire Hathaway annual report shares a helpful illustration on why we invest versus leaving our savings in cash. In the period from 1964 to 2014, the S&P 500 rose from 84 to 2,059. With dividends reinvested, this amounted to an overall return of 11,196%. During that same time period, the purchasing power of the dollar declined -87%, as measured by the Consumer Price Index. In other words, it now takes $1 to purchase something you could have bought for $0.13 in 1965. This is why one invests; to protect against the erosion of purchasing power over time.
Cory Nakamura CFA, CFP®
Chief Investment Strategist and Financial Advisor
CERTIFIED FINANCIAL PLANNER™ professional
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