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An Ill-Advised Investment

Winston Churchill Statue/Monument, Copenhagen

Winston Churchill: Good at a lot of things, investment wasn’t one of them.

In 1929 Winston Churchill, the future British Prime Minister, was touring the United States and Canada. Churchill had just stepped down as Chancellor of the Exchequer, a high government post equivalent to the Treasury Secretary in the U.S. Freed from his duty of overseeing financial policy for the British Empire, Churchill had time to focus on his personal wealth management and investments. In a letter to his wife, Clementine, dated September 19, he boasted of his success in this new pursuit:

I was watching CNBC this morning and the interviewer began the interview with the two portfolio managers invited onto the show and the interviewer lead into the segment with the following question which then became the initial banner for the viewing public; ”election years;  steeped in market uncertainty, will the market be down?

ONEIL 5.27

I thought the two guests on the show did an admirable job of answering the interviewers questions, but it provided to me a crystal clear contrast on the differences between the investment professionals goals and the goals of the interviewer; The investment professionals were attempting to educate the viewers to their firms unique investment philosophies on a macro level basis, where the media personality was trying to gain additional viewership.”  There is nothing wrong either side’s points of view as they were just doing their job, but one needs to understand what their respective goals are and act accordingly. 

Investors instinctually get on and off the train at the wrong time

There is a common assumption that average market performance and average investor performance are roughly synonymous. If the market has a good five-year run, investors have a good run. If the market is down over five years, investors, on average, lose money. However, since the market almost always goes up in the long run, a patient and diversified investor should get solid long-term results, right? That is what most believe.

The problem is that investors, on average, do not succeed in taking advantage of long-term trends. They do not approach the market in an entirely rational, wholly prudent way. Great market news excites people and spurs them to buy when prices are high. Sharp drops and prolonged downturns discourage or frighten people into pulling back and liquidating assets.

Oil crisis in Russia. Bad debts in China.  Impeachment proceedings in Brazil.  Emerging markets have plenty of issues to navigate, but a closer look shows that much of these concerns are already baked into the stock prices, perhaps overly so.

Emerging markets present attractive long-term growth opportunities generally not seen in developed markets: Younger demographics, a growing consumer base with rising wages and debt-free balance sheets, and government policies that are opening up countries to outside investors.

But emerging market stocks have lagged their developed market counterparts badly in recent years.  Since October 2010, emerging markets have declined 6.0% annually while U.S. large cap stocks (as measured by the S&P 500 Index) have gained 10.0% per year.   The last time emerging markets lagged this much was when the U.S. went through the 1990s tech boom:

Callahan 05.18

The presidential election is coming up in less than 6 months and even though it is still too early to know what party will control the White House, we have been asked many times by clients “How will the election change the tax code and the financial landscape?”  This article is not about any preference as to what party wins, but what changes in the tax code may be proposed based upon whether the Republican or Democratic Party winning.  Some of the high level changes from an individual filer perspective that have been proposed by the present leading candidates are detailed below (

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