CEO Report: Third Quarter October 17, 2018
Fall has always been my favorite time of the year, with the crisp cool evenings, the trees lining the streets with beautiful rich color schemes, and fall sports returning to our Monday morning water cooler conversations. As I complete my 32nd fall season at Petersen Hastings, there have been many lessons learned as part of this journey. The following are two of these lessons that I would like to share with you, especially in light of the recent stock market movements:
The stock market goes up and the stock market goes down. Most investors are happy when they see their stock values appreciate and feel the opposite when values decline. Historically, stocks have appreciated over the long term (at least 5 year periods), and periods of appreciation have been longer than periods of decline. This being said, as investors, we need to be prepared for these periods where the stock market may decline. Sometimes, these periods last days, others may last weeks, months, or even years. Recently, we have witnessed the stock market decline sharply in just a few days. While this may be unsettling, especially for a new investor, the only abnormality is that we have not seen more declines over the past several years. We believe this volatility is healthy for the stock market. Volatility drives up the expected return for stock investments over other investments, such as treasury bonds or bank certificate of deposits (CDs), resulting in a better long-term hedge against inflation.
There are ways to reduce risk and receive what some may call a “free lunch.” Diversification is one of these ways. By statistically owning most or all of a particular market, you are able to maintain a level of expected return without the concentrated risk of owning only a small number of stocks. Should a company unexpectedly go out of business and you own the stock as part of a large diversified portfolio, you are not impacted like the investor that “only” owns that company’s stock or where the stock represents a large percentage of their overall portfolio.
At Petersen Hastings, diversification across domestic and international markets is one of our important tools utilized to build portfolios designed to withstand the impact of market volatility. For the many other tools that we use, we encourage you to meet with your Wealth Advisor.
This Time is Different
This is one of the most dangerous comments that I have heard over the years. I cringe every time someone mentions these words. It seems like it was yesterday that investors were quitting their day jobs to be day traders, companies that were hemorrhaging red ink were going public with initial stock valuations that were mind boggling, and investors were expecting 50-60% annual returns. This was 1999. If their company was tied to the dot com industry, it was like they were printing money when they went public with their stock. It is interesting that this period was similar to the electronics boom of the 1970s that had a similar fatal ending. Investors were justifying returns by saying that earnings were no longer important in valuing the company. Market share or the possibility of being a “hit” down the road was replacing good old company fundamentals that have been reliable throughout history. Well, those that have researched the history of the market or have a little grey hair like me know that the stock market for these high flyers imploded in 2000.
One of the most important roles we play for our clients is keeping this type of dangerous investment out of portfolios. Clients may also contact us to review an investment they are considering making. This may include a new business or some idea a “friend” presented to them. We always welcome these conversations. Another important role is being the first line of defense against allowing emotions to creep into our investment actions. Emotions may push you to want to sell when the stock market is low and buy when it starts moving higher. We encourage our clients to let us know if their emotions are making it difficult for them to stay the course.
October is Cybersecurity Awareness Month
While October may be the “official” Cybersecurity Awareness Month, every day of every month at Petersen Hastings is focused on protecting our clients from cybersecurity “bad actors.” While we have a very comprehensive program that includes client portals, policies, procedures and education; our clients are the first line of defense. Being a strong first line of defense involves maintaining strong passwords and changing them regularly, avoiding including personal information in e-mails or attachments, and being on the constant lookout for phishing emails. Any time you are tempted to click on a link included in an email, please take a moment and really think about the genuine nature of the message. If you are not 100% convinced it is genuine, pick up the phone and call the sender to make sure it was sent by them. There are many other steps you can take to protect your personal information. We encourage you to discuss this topic with your Petersen Hastings Wealth Advisor.