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Protecting Clients From Net Worth Sucking Ghouls

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The ink was barely dry on our previous missive when the collection of worries plaguing global equity markets in the fourth quarter of 2018 evaporated into thin air. The US equity market1 returned 8% in January and went on to return nearly 14% in the first quarter. The recovery in stock market prices was a global event, although international developed2 and emerging markets3, which both gained about 10%, continued to lag domestic returns.

To no one’s surprise, talking heads in the financial media quickly pivoted from discussing the risks of a looming recession to segments that would best be described as “FOMO” (Fear of Missing Out) on steroids. Worst of all were the pundits – omnipresent in the fourth quarter – who earn a living propagating the notion that selling a sizable portion of your equity portfolio at the first sign of trouble with the belief that you can “get back in” at the exact right moment. After offering this profoundly unsound advice to anyone who would listen, these folks suddenly disappeared when the calendar turned and markets sharply rallied. Like the Dementors in J.K. Rowling’s Wizarding World of Harry Potter series who suck the life force out of anyone unfortunate enough to cross their path, these real-life ghouls survive by sucking the net worth out of the misguided souls who follow their advice. If an investor sold all of his or her equities at the beginning of the year and repurchased them at the end of the quarter, presumably when the nerves had sufficiently calmed, he or she would have to figure out some way to beat the market by 2.5% per year for the next five years just to break even on this panic-induced decision. That’s before even considering the tax consequences of such a maneuver.

Worst of all were the pundits – omnipresent in the fourth quarter – who earn a living propagating the notion that selling a sizable portion of your equity portfolio at the first sign of trouble with the belief that you can “get back in” at the exact right moment.

It is our duty to act as a Patronus charm for our clients and prevent them from falling prey to the ideas bandied about by the Dementors on television and social media. To do so, we follow a fairly simple process. First, we work with our clients to set financial goals and develop a plan to meet those goals. Second, we choose investments that we believe provide the best possible chance of meeting those goals at the lowest acceptable risk of failure. Third, and often the most psychologically difficult step, we make sure our clients follow the plan. The plan exists because markets gyrate wildly from time to time, not in spite of this fact. Even if the late-2018 sell-off had continued into 2019, the right course of action would have been the same: rely on the plan, act rationally, and keep a long-term focus.

Throughout the whipsawing markets of the last six months, rest assured that it was business as usual at Kovitz Investment Group. The equity portfolio management team sought out securities of companies that possess sustainable competitive advantages, high returns on invested capital, sensible levels of debt, a management team that prudently allocates capital, and that they believed were trading well below fair value, purchasing a number of current and new holdings when prices fell in 2018, and mostly returning to patient vigilance as equity markets recovered in 2019. The fixed income portfolio management team continued to fill up our clients’ core bond portfolios with bonds issued by high quality municipalities and corporations and unearth opportunities in lesser known corners of the market.

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Kovitz Newsletter 3-31-2019 Spring REV

 

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