After months of steady advance, stock prices broadly declined in September, with equity market benchmarks down 3-5% for the month. Notwithstanding this setback, equity indexes are up more than 10% for the year to date, nice progress for patient investors. Prices of government and corporate bonds also fell in September, though these less volatile securities were down less than 1% for the month.
Bartlett is accustomed to stock market turbulence, mindful that 5% setbacks typically occur 2-3 times every year, and a 10% decline can be expected once every 12-18 months. But selloffs always attract media scrutiny, often sensational. Is the recent weakness the beginning stage of a more serious bear market decline? Do lower stock prices signal a recession in the next year? Are bond prices destined to fall further because of higher inflation?
Many a “talking head” on television might confidently propose answers. But these questions remind us of a memorable quote from the late economist John Kenneth Galbraith: “There are two kinds of forecasters: those who don’t know, and those who don’t know they don’t know.”
Principles instead of Predictions
Bartlett’s investment strategies are not based on presumed predictive prowess. We claim no special advantage in forecasting macroeconomic variables or gauging political outcomes, and we know that market direction is especially unpredictable over short time periods. We also recognize the dangers of overconfidence; more aggressive strategies based on short-term market forecasts usually end in disappointment.
Market volatility and vexing uncertainties reinforce guiding principles for long-term investing and financial planning that have been validated throughout our history. Some favorites are highlighted below.
Stock Prices ultimately parallel Business Performance
Stock market benchmarks are up tenfold over the last thirty years, notwithstanding major setbacks during two recessions and a pandemic. This works out to an 8% annual growth rate, similar to the growth rate of corporate profits and dividends during this time. Stocks flourished because businesses thrived. Bartlett expects good companies will continue achieving progress, buoying stock prices over time and rewarding investors. Our companies are on track to achieve higher earnings and dividends in 2021 and we expect further progress in 2022.
Time in the Market, not Market Timing
Occasional turbulence makes “market timing” seductive for many, but this almost always backfires. The usual outcome is a “behavioral penalty” of lower long-term investment returns. This is because the timer usually sells after declines are underway and later repurchases when prices are higher. We know of no investor with a record of success in market timing. Much more important is making sure a portfolio will participate in long-term progress. After all, even a new retiree could have a planning horizon of thirty years, given expected longevity.
As noted in previous commentaries, the most rewarding periods for equity investors are in the early stages of recovery from economic setbacks. Later, when economic expansion is broadly recognized, progress becomes more difficult, and risks increase. We think this is the setting now, given the headwinds of higher inflation and rising interest rates, and the probability of higher taxes. Lately our investment selections have emphasized less risk, recognizing the currently high valuations for both stocks and bonds. With equity price/earnings ratios generally above 20, and interest rates historically low and often negative after inflation, the margin of safety for investors is smaller than we like.
Keep Appropriate Safeguards
Bartlett believes investments should always be carefully balanced and thoughtfully diversified. Bonds and other less volatile investments help control risk, and cash is necessary for anticipated withdrawal requirements. With prudent safeguards in place, occasional stock market declines should not disrupt financial plans, so that quality investments can be maintained rather than reactively sold. Moreover, a balanced strategy should allow an investor to capitalize on buying opportunities created during selloffs, benefitting from occasional disruption while others are threatened by it.
Maintain Rational Expectations
We are not unduly exalted in good times nor downcast in bad times. We try to be dispassionate and objective throughout, staying focused on key factors including asset allocation and diversification.
Guided by these principles, our goal is “all weather” investment results for you. This means strong participation in rising markets and comparatively resilient performance in difficult times. We think this will fortify the “staying power” needed to achieve long-term performance, which helps assure successful financial plans.
We are pleased to share Bartlett’s recent inclusion in Barron’s Top 100 Registered Investment Advisors. This is nice recognition for the professionals and administrative staff who work so hard to maintain excellence in our investment management and financial planning.
We love our profession and know our work is made possible by your loyalty. We are very grateful for your confidence. Bartlett has been steadily adding new clients this year. We hope you will recommend us to family, friends, and associates who could benefit from our services.