Fourth Quarter Letter to Our Clients: The Randomness of Returns

At the time of our last quarterly letter, there was uncertainty as to who the next President of the United States would be. On November 8, 2016, the less likely scenario played out, and every news outlet was convinced that the stock market would have a negative reaction. Looking at the Futures markets the night of the election, all the negative predictions looked as though they were correct—the market was dropping off sharply. However, by the next morning, the market slide was over. As we have now seen, the U.S. markets responded in a positive fashion, with the S&P 500 Index up almost 6% from the beginning of November through the end of the year. The point here is that predictions regarding market movement are not good indicators of future performance, and therefore should not be used to make investment decisions.

As you know, we don’t base the investment recommendations we make for you on predictions or on hunches. Instead, our investment process is based on disciplined, long-term investments in well-diversified portfolios. Different asset classes tend to take turns providing the highest return in any given year—an effect called randomness of returns (see the enclosed insert titled “The Randomness of Returns” for the ranking of returns of twelve different asset classes over the past fifteen calendar years). Predicting which asset class, fund, or stock will out-perform during a specific time period is something that no one can get right every time—there are just too many unknowns. But as the saying goes, “Every dog has his day,” and we see that reflected in the asset classes we use to build your portfolio—each one has its day, so to speak. Look no further than 2015, when U.S. Small Cap Value was the second worst performing asset class of the year. One year later in 2016, it was the best performing asset class of the group. The point is, no one can predict the future returns of any asset class with any degree of certainty or consistency. However, what Pacesetter Financial Group can do is structure a custom, diversified portfolio for you so that you are in position to capture these returns when and where they do happen.

If we had reacted to the predictions of the financial pundits in early November, rather than staying disciplined in our approach, you could have missed out on some of the best performance of the year. But that’s probably one of the main reasons you hired us—to help keep you focused on your long-term goals, and to help you avoid getting derailed by the “noise.”

By Clayton George & Andy Fitzpatrick

The Randomness of Returns

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