Portfolio Performance Reports Available on Your Portal: We have finished reconciling all client portfolio performance reports and have uploaded them to the “performance reports” folder in the vault section of your client portal. Please read the Market Insight section below for a brief summary of 2016 market performance.
Sharon Wallyn, our new administrative assistant based in Chicago, will be calling you in February to introduce herself and to see if you would like to set up an appointment to review your portfolio performance. For our Affordable Family Office clients, Sharon will also see if you would like to drop off your tax information.
Tax Organizer for Family Office Clients: Isabelle sent out a tax checklist for all of our Affordable Family Office Clients. Please let us know if you did not receive a checklist. If any other clients would like a tax organizer, please let Isabelle know and she can email it to you.
Staff Change: Isabelle and her husband Steve will be adding a baby boy to their family in May. Isabelle has decided to be a full-time mother and will be retiring from D3. We are in the process of hiring another CPA and have identified several extremely qualified candidates. We should have this transition completed during February before we get too heavy into tax season for our Affordable Family Office clients. Please wish Isabelle congratulations and good luck on her new career of being a mother.
2016 Summary: 2016 began where 2015 left off with fears of slowed growth in China, declining energy prices, and interest rate hikes. During the first 5 weeks of 2016, we experienced an uncomfortable but healthy correction, leading to a 10% decline in the S&P 500. After the poor start, the U.S. stock market rebounded and the S&P 500 ended the year up nearly 12%, shrugging off two major political surprises including the Brexit vote and Donald Trump’s election as President. The advance in U.S. stock market was due to improving economic fundamentals and the expectation for business-friendly economic policies under the new Trump administration.
Also, during 2016, we saw the dollar continue to strengthen and both short and long term interest rates rise. These were major headwinds for both fixed income and international stock asset classes. Both of these asset classes returned less than 3% for the year. The best performing asset class for 2016 was U.S. small cap stocks up 26%.
Because we focus on risk-adjusted returns and use asset class and mutual fund diversification in all our client portfolios, your 2016 returns will be fairly close to the projected returns we use for our asset allocation models. Keep in mind that diversification will always lead to under-performance in up markets, but is designed to provide for out-performance in down markets. Because we will inevitably experience down markets, the less a portfolio loses in a down market, the less a portfolio must gain on the way back up (a 50% loss requires a 100% gain to breakeven).
Although the fourth quarter of 2016 GDP growth was lower than expected, if unemployment remains low and Congress passes an economic stimulus packages, we would expect increased inflation expectations, which in turn will lead to higher interest rates. This will be a headwind for fixed income asset class. We adjusted all client portfolios over the last two weeks reflecting this expectation.
We are somewhat concerned that until our new President understands the economic consequences of his shoot-from-the-hip mentality, market volatility will pick up. We consider most of the Twitter tweets market noise, similar to the talking heads on TV. We have great confidence in the checks and balance of power that is built into the U.S. constitution. We have seen over the past 8 years that the U.S. economy can continue to operate despite a dysfunctional government.
We do believe that some political uncertainty will lead to some economic uncertainty in 2017. As a result, we expect pockets of market volatility that will be more prevalent than what we experienced in 2016. These periods of market stress, which will not feel good at the time, are signs of a healthy stock market. These periods of stress also reinforce the benefits of a diversified portfolio to reduce downside risk. If you are unsure of how your portfolio is positioned for risk, please give Don or Adam a call.
From an internal perspective, D3 is in the process of reviewing our preferred list of mutual funds and exchange traded funds. Our focus is on evaluating if these investments meet our risk reward criteria at a reasonable cost. Fidelity has announced a new “Z share class” for a select group of mutual funds. We will be switching to this share class as it becomes available to reduce the expense ratio if this group of funds remains on our preferred list.
Thank you for letting us serve your financial planning and investment management needs. Let us know if any of your friends or relatives have similar needs.