With the election behind us, many are wondering what’s next in a year that has proven to be a very volatile market. As such, I thought it would be helpful to review what we own and some recent performance. In our last letter I mentioned that we were in a stock market bubble. Why weren’t we reducing our exposure to stocks then? Recall I described a Jekyll and Hyde type scenario where large tech-oriented companies were approaching record over valuation, while other industries and broad asset classes were very reasonably valued.

These are clearly unprecedented times in nearly every respect. During times of massive change and unknown, it’s important to pause and take stock of ourselves and our guiding principles.

We have been consistently telling our clients for the last 18 months this is a difficult environment, do not expect returns like those of 2016 and 2017, and volatility is likely.  Well, I guess we got what we wanted. 

Investors are finally rethinking the economic impact of the Covid-19 virus. As if the voluntary shut down of one of the worlds largest economies wasn’t enough, the news this weekend highlighted outbreaks in Italy and South Korea.

As the year unfolds, evidence is mounting that the economy is slowing, with multiple factors at play. The Federal Reserve reversed course quite suddenly at the end of December from raising rates to a more neutral, and even accommodative, stance. Some have begun to question whether we may see recession in 2020.

I have previously discussed the biggest risk in today’s markets is that investors will be unable to achieve their goals. In terms of retirement planning, either investors will have to work longer or save more, and current retirees will risk outliving their funds. High valuations, and thereby low expected returns, are the culprits. We have been positioning our clients to weather this environment and fortunately, the significant increase in volatility recently seen is here to help.

As the current bull market continues, more investors are starting to predict the day it all comes to an end. Instead of trying to predict a market top, according to Mark Hulbert (of Marketwatch), investors should view market tops as a “gradual process in which equity exposure is slowly and deliberately reduced over time.” Predicting tops is not only unproductive, but it is also impossible to be accurate. Trying to pinpoint the precise date of a market top cannot be done because markets all reach their tops at different times. 

Buffett was on CNBC yesterday (8/30/17) discussing the tragic disaster in Houston. Naturally, he was asked about Berkshire Hathaway's reinsurance exposure and his comments highlight the idea he espouses, "Be fearful when others are greedy."

If you are like most people, you have 75% or more of your stock market investment in US equities[1]. The truth is, it’s not just the lay investors that are subject to this “home country bias.” Most financial advisors and money managers are equally prone to this bias. With the US accounting for only around 50% of global output and at historically high prices, a diversified portfolio should consist of a much greater allocation to foreign stocks.