Q1 2016: The Quarter to Nowhere

The following is adapted from our Q1-2016 Newsletter...

If December 31, 2015 was the last time you checked your portfolio, then your first quarter returns may make you shrug. Last quarter was pretty mundane, right?

Anyone who tuned in knows how much of a rollercoaster those three months actually were. And like a rollercoaster, you ended up roughly where you started. Volatility is the norm in investing, but Q1 was still unusual for how quick of a roundtrip it was.   

U.S. Stocks = Vanguard 500 Index; Developed Int'l = Vanguard FTSE Developed Markets ETF; EM Stocks = Vanguard FTSE Emerging Markets ETF; Core Bonds = Vanguard Total Bond Market Index; High-Yield Bonds = BofA Merrill Lynch U.S. High Yield Cash Pay

There was no single obvious catalyst for the downturn or for the turnaround, although there are many candidates: oil prices, the Fed rate hike, concerns over China’s management of the economy, negative interest rates.

Q1 was a small-scale version of the cycles described by Howard Marks in his 2011 book The Most Important Thing:

Investment markets follow a pendulum-like swing between:

• Euphoria and depression [greed and fear],
• Celebrating positive events and obsessing over negatives
• Overpriced and underpriced

The oscillation is one of the most dependable features of the investment world.
— Howard Marks

We believe Marks’ pendulum analogy is closer to the mark than any Q1 world events.

Investors who remained patient and resisted believing that the sky was falling should pat themselves on the backs. Many others sold, and did so at low prices. Cycles create risks for investors who succumb to the fervor (“this time is different!”) and opportunities for disciplined long-term investors.