A Sample Year-End Letter for Clients
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To all our clients and friends:
I hope all is well with you so far this new year.
You have likely heard me plead the case that we must embrace volatility if we are going to invest in the stock market. It is the very fact that the markets fall precipitously at times that allows for returns higher than the risk-free rates earned on money markets and savings accounts. This is because timid and ill-informed investors bail out, leaving significant growth opportunities for those who stay the course. To survive these falls we must prepare ourselves financially, but more importantly we must prepare both mentally and emotionally. The past two years have been an outstanding training ground for learning the lessons of successful investing; making a well considered decision based on knowledge of markets and how they work, then having the temerity to hang on while others succumb to fear.
How do we prepare for the certainty of down markets? First, ensure that you have the time necessary to recover from a down cycle in the market. Have enough safe and "liquid" assets free from the vagaries of the market to allow for stock prices to recover from their fall (here we use the term liquid to mean safe from any price fluctuations, market risk or specific issue risk; not its currently misguided usage to mean marketable, or easy to sell quickly; arguably any equity mutual fund could meet that bastardized definition).
How much short-term safe money you need is not just dependent on your spending needs, but also on your own "risk" aversion; "risk" in quotes because though the investment industry has defined risk as short-term market volatility (which it is for institutional investors). For individuals prepared to stay the course in the face of mass media induced hysteria, risk is simply not having enough money when you need it. You have most certainly heard me say this before, but it bears repeating (no pun intended).
This begs the question "what is the short term?" ... beyond just defining it as a period of time you personally can be comfortable with. It just so happens that I have come across some useful statistics recently we can use as guidance. Wayne Thorpe, senior financial analyst at The American Association of Individual Investors Journal (a.k.a. AAII Journal) has recently shared the following statistics with its members (side note – I wrote many dozens of articles for the AAII Journal from the late 1980s through the 2000s; for those interested, here is a link to a handful of the over 50 articles I wrote for the Journal).