Note from Our CIO: A Year to Remember

Happy new year everyone! One of my favorite New Year’s Eve activities is watching TV programs that recap the year. Unfortunately, I could not find a show that recapped the financial highlights of 2013, so here’s my highlight reel.

Think back to a year ago, when politicians in Washington were in the grip of one of their now familiar “fiscal cliff” standoffs. As has become the custom, the theater of brinksmanship kept everyone guessing until a last-minute resolution.

For some, the excitement was just too much. The publication Financial News told its readers that “political storm clouds loom over the global economy. From Washington to Beijing, the financial markets are in thrall to seismic political events.”

In The Economist, the tone about 2013’s prospects was equally skeptical, if not quite as dramatic. The magazine noted that while surveys showed investors were optimistic, the coming year was unlikely to be one to remember.

The reason was that the gains of 2012 partly reflected relief that the worst fears about the eurozone had failed to materialize, the magazine said, which meant that reality might intervene as investors judged shares as expensive.

“Although investors are not as complacent as they were heading into 2000 or 2007, say, it is still hard to believe this will be a bumper year for returns,” Buttonwood said in his column in The Economist.

The skepticism was global. The Australian Financial Review quoted analysts as saying the prospect of rising bond yields and slowing profit growth did not augur well for a repeat of the performance of risk assets (i.e., stocks and real estate) seen in 2012.

“Analysts are predicting no end to the volatility that has gripped markets over the New Year period, posing dilemmas for investors wondering how to invest in 2013,” the reporter concluded.

It’s easy to see from all this forecasting that many investors might have taken fright at the developments around the turn of the year and sought to trim their exposures to risk assets because of what the media pundits were saying.

That would have been a shame because by the end of 2013, many global equity markets were notching record-breaking years. The S&P 500 total return index, for instance, was up by just over 32%, its biggest annual gain in more than a decade.

In Japan, the Nikkei 225 total return index was 53% higher as of early December, heading for its best yearly gain since 1972. In the U.K., the FTSE 100 total return index reached a 13-year peak in May 2013. It has come off a little since then, but was still nearly 15% higher for the year by December. It’s noteworthy that much of this appreciation has been due to increases in company earnings as opposed to investors’ willingness to pay significantly more for the same amount of earnings, as was the case in 2000 and 2007.

As 2013 recently came to an end, there are still plenty of gloomy stories to fill the newspapers—including ongoing speculation about what happens when the U.S. Federal Reserve begins tapering its monetary stimulus program. But as an individual investor, there is not much you can do about that. These expectations and uncertainties are already built into the each company’s stock price.

This isn’t to say these stories are necessarily incorrect. Most of them accurately reflect the sentiment prevailing at the time they were written and the uncertainty about the future. But acting upon them by increasing or decreasing your risk is tantamount to saying you both know tomorrow’s news and how the markets will respond to this news.

Investing is about what happens next. We don’t know what happens next. That’s why we diversify and focus on what is in our control: our asset allocation, our plan for saving or withdrawing, and keeping fees and taxes low.

Best wishes for a prosperous 2014!

Regards,
Darius