Thoughts, Reflections and Insights as We Enter 2019

| January 02, 2019

Happy New Year and greetings from 4J Wealth Management! We are thrilled to report that 97% of clients followed us from our previous firm. The vast majority (80+%) did so within the first 30 days. We were and continue to be overwhelmed with gratitude for your trust and positive feedback as we enter 2019. While the market was not as positive in the fourth quarter (we will get to that in a minute), we wanted to share some of our insights and reflections as we look back to 2018 as well as forward to 2019.

The press does many things well and deserves credit for reporting stories as they see them. However, when it comes to financial media reporting on the markets, one has to be cautious not to lose perspective and get caught up in the reactionary and dramatic impulse they are playing to. Its goal is to get you to pay attention, and they are masters at penetrating your attention filter. There is a vicious feedback loop we can easily get caught in when we see our accounts going down and read ONLY negative news about the markets. Even as professionals, we have to remember to keep our wits and not enter a reactionary mode. That being said, let's take a look at what happened in 2018 relative to recent history and broader market history.

In 2018, the S&P 500 was down 4.5% including dividends. This marks the first down year for the S&P 500 in the last 10 consecutive years. In fact, all 14 asset classes we track were negative in 2018 with the exception of cash. So, yes, while the fourth quarter was the worst since 2008, the big picture is that even if you include 2008's negative return of -36.9%, the S&P 500 is still up 114.4% (more than double) or 7.2% per year.

HOWEVER, the news headlines you will see are: "Dow records worst year in over a decade' or 'Dow has worse quarter since the Great Recession in 2008'

Furthermore, the Summer of 2011 logged a worse 3 month return except it did not fall cleanly into a calendar quarter, so it is easy to forget! 2011 was the year when the US debt was downgraded from AAA to AA.

Volatility in 2018 also distorted one's ability to see the forest through the trees. The reason is because in 2017,the S&P 500 not only returned 21.7%, but it was the lowest volatility calendar year in the history of the market! That is a pretty incredible feat given a 100+ year history. Human beings are inclined to judge events based on recent history, and when you follow a year like 2017, 2018 is going to feel like 2008, even though it was not even close.

If you looked at your statement only once this year, at the end of the year, you might be disappointed to see that you were down several percentage points. But would you feel the same way as if you were checking your account monthly or even weekly and judging your performance only from the most recent absolute market peak? This is critical information to keep in mind because the market does not move in a straight line, but our mind naturally thinks to move in a straight line. If babies continued to grow at the same rate from 0-1, they would be 6 feet tall within a few years of birth. While not a perfect analogy, anchoring your reference points to recent market peaks is like comparing your performance only relative to your personal record. You are not going to run faster every time you run, but the goal is on average to run faster over time. This is exactly what happens over time with the equity markets.

So, 2018 truly was about resetting our expectations and coming back down to earth. The market does not always act rationally, and in the short-term can move a lot with no real reason. 2018 is a good reminder and teaching point that in order to be successful at making money in the market, we need to maintain perspective and not let the vicissitudes of the market cause us to make fear-based and hasty decisions. By controlling what we can, we can have confidence in our long-term success and put short-term market gyrations in perspective. Comprehensive financial planning is the best antidote to market volatility.

As we turn to 2019, we are focusing our attention on the facts - unemployment, inflation, corporate earnings and interest rates. 2018 was strong in all these areas and yet the market declined, mostly due to fear in what might happen, not what actually happened. There are risks on the horizon, as always, such as trade negotiations with China, interest rates, repercussions of Brexit, political instability in the US and abroad etc... No doubt, we will be faced with our share of global challenges as we have in years past. However, remember to focus on the positive and the gradual improvements occurring that are likely not reported because they are not 'reportable.'

As a New Year's resolution, the best thing you can do is to revisit your financial plan in the context of your updated circumstances and goals. We will continue to monitor and invest your money with prudence and with keen attention to your time horizon, goals and risk tolerance. The longer the time between comparing two figures, the less negative or fearful it appears. For example, the Dow Jones closed on 12/31/2018 at 23,327. On 12/31/2008, it was 8,772. Quite the growth!

Thank you again for your support. We look forward to working together in 2019.