Annual Letter to Clients – Cliff Notes Version

Annual Letter to Clients – Cliff Notes Version

Correction to previous blog: The portfolio yield should be the average of the yields of the four indexes or about 1.9%. This should be offset by the overall portfolio loss of -.7% indicating a net portfolio total return for the year of about 1.2% and not the 4.5% portfolio yield shown in the blog.

The last blog contained a sample letter to clients from investment managers. I also suggested that do-it-your-selfers prepare a similar letter to themselves. The purpose was to show investors how their portfolios performed last year.

I received a lot of calls 1) thanking me for the sample letter and that the letter was forwarded to their investment managers, 2) telling me that they loved what I did, and 3) some people telling me they did not understand it. Today’s blog addresses the people that did not fully understand it.

I take a lot of pride that I write clearly so the reader can understand and grasp pretty complicated issues. Since some people had trouble understanding the letter, I decided to prepare this abbreviated version with the salient points without the excess verbiage. This is a very important issue and should be understood by every investor. A lesson here is if you don’t understand what your advisor tells you, either have them repeat it until you do or assume they are wrong. I believe I am right, so am repeating it.

1. In 2015 the stock market was pretty flat. Overall there was a small loss but this was offset by dividends creating a net gain of about 1.2% assuming equal amounts were invested in each index fund
2. Interest rates remained unchanged for the year. Bond values ended the year pretty much as they started and a 20 year laddered bond portfolio actually paid about 3.2% interest
3. The Fed raised interest rates an insignificant amount but used it to signal that they believe the economy has strengthened and they will now start thinking about holding back growth
4. The situation that emerged last week in China had a major effect on our stock market proving that we are part of an interconnected global economy. However the stock market does not reflect actual economic activity. China’s economy was still up about 5% last year (instead of the expected 7%) and is expected to grow this year at least by that amount
5. I do not recommend investing in foreign stocks or bonds. Two reasons: 1) most of the major U.S. companies do substantial offshore business providing the foreign exposure we might need, and 2) it is complicated – foreign investments are subject to individual company fortunes AND also currency changes, inflation and interest rates, the political climate, unemployment and growth rates in each foreign country
6. I do not recommend commodities for many of the same reasons as foreign investments and also that the do not pay dividends
7. The ten year trends indicated by the charts I posted show upward growth, but also show that the growth is erratic and not a smooth continuous climb. Make your plans, review them, reaffirm them and sit tight through the markets’ vagaries

The purpose of these blogs is to show you what to expect in the way of an annual market update if you pay someone to manage your investments. I do not think it is unreasonable to expect to receive a retrospective of the year’s performance compared to your portfolio’s performance. Use the above as a guide to what happened last year and see how you ended up.