July, 2015
By Darren Nyce, CFA
Senior Research Analyst, Castle Investment Advisors®, LLC

Lessons from the Trail

Earlier this spring I joined 3 of my buddies on a backpacking trip through Zion National Park in Utah. This remarkable adventure was a bit outside my box of typical experiences but was one that left me deeply satisfied. I discovered that many of the important takeaways from this journey are transferable to our experience as investors. So, in homage to the recently retired David Letterman, here are my top 10 investing lessons learned from the trail (though numbered, in no particular order of importance).

10. You can’t expect to succeed without proper preparation

  • For the trail this included buying the right gear, adequate physical training, and planning our route.
  • Successful investing begins with thinking through an objective and constructing a plan.

9. Take advice from the experienced

  • 2 of the guys in our group were veteran backpackers and I owe much of my enjoyment of the journey to their wisdom – thoroughly break in your hiking boots, pack light, avoid cotton clothes (though this did lead to the incredulous reaction from Mrs. Nyce “You spent $50 on a pair of wool underwear?!?!”).
  • Finding an experienced advisor who keeps your best interest in mind while helping you construct, implement, and navigate your personal investment plan is invaluable.

8. Achieving your objectives often takes longer than you think

  • Training on the flat lowland trails of Indiana, I could frequently knock out a 3+ mile per hour pace –in Utah, at 7000 ft., carrying 40 lbs up and down steep grades we would often average half that.
  • The investing journey is not linear, the economy and the market have cycles, meaning there will be times when it seems like it is taking forever to reach your goal, be patient.

7. Identify the risks

  • A rattlesnake bite or falling off of a cliff can ruin an otherwise enjoyable hike.
  • Market risk, interest rate risk, and geographical risk are just a few to be on the lookout for and know what kind of impact they have on your investment portfolio. Keep in mind that one of the biggest risks is bad behavior by the investor.

6. Be appropriately cautious

  • While a certain amount of adrenalin inducing activities can make things more exciting, prudence (and the responsibility to return to my family) requires not taking unnecessary chances.
  • With the risks identified, diversify your investment portfolio to minimize those risks and lower the chance of a disastrous outcome. Invest with the mindset of avoiding big losses.

5. Know yourself

  • One portion of our hike took us to Angel’s Landing, a frequent member of ‘best hikes’ in America lists. This trail has places that are only a few feet wide with 1000 ft. drops on either side. Over the years several people have lost their lives here due to reckless behavior or overestimating their own ability. One member of our group who struggles with vertigo wisely decided to sit this one out.
  • Know how much investment volatility you are able to tolerate and make sure that your portfolio is positioned accordingly. This will help keep you from taking emotionally based actions that negatively impact your performance like selling low because something has dropped in value.

4. Once you’ve started, you are committed to the long haul

  • I vividly remember the feeling of being dropped off at our trail head to begin our hike. The only recourse at that point was to start walking and continue according to our plan until we arrived back at civilization 3 days later. Sometimes the trail would turn away from our objective to go around some chasm. However, staying on the trail was far better than trying to directly cross the canyon. Ultimately, staying on the path got us to our destination safer and faster.
  • Stick to your investment plan, don’t place too much weight on short term performance. Keep the long view in mind. Temporary turns away from your goal are inevitable but staying the course is what is best for you in the long run.

3. Success is different for everyone

  • We came across some long distance trail runners whose goal for the weekend was to run 3 laps around the National Park, a distance of about 120 miles. Our goal was decidedly different, though we were traversing over much of the same ground. It would obviously not be useful to gauge the success of our trip by using the measuring stick of a trail runner.
  • The only real measure of investment success is to determine if you are on track to meet your objectives. In most cases, this has very little to do with beating a mostly arbitrary index.

2. The ultimate decision tool is “Is it worth it?”

  • The trail requires many value judgments about what your time and effort are worth. We decided it was worth it to go 0.3 miles out of our way to top off our water bottles, but it was not worth it to spend an extra 40 minutes to ascend 800 feet to where there was a toilet.
  • Investing requires endless decisions about which opportunities are worth putting your capital at risk. I am often asked whether I like a particular stock. The answer to this question must be provided in the context of its price. I may not like it if I have to spend $60/share but may love it if I only have to spend $30.

1. Be diligent about what you can control

  • There are plenty of things in nature that we cannot control, but we can get the wrinkles out of our socks, tie our laces tightly, and close the tent zipper completely. This doesn’t guarantee a great experience but it does improve our chances.
  • There are no guarantees in investing either, but our chances improve when we do things like keep costs low, utilize diversification, maintain wise decision making skills, and keep the long view in mind.

2nd Quarter Review

Looking back over the second quarter of 2015, the question of when the Federal Reserve will raise its benchmark interest rate remained at the top of the list of things for the markets to digest. Other events that dominated headlines were the Greek debt crisis, stabilizing dollar strength, the supply of and demand for oil, and the declining unemployment rate. The result, as you can see by the chart below, was less than spectacular for most asset classes and produced mostly a stalemate between buyers and sellers.

Index 2nd Qtr
2015 Return
1 Year Return 3 Year
Annualized
Return
5 Year
Annualized
Return
S&P 500 0.28% 7.4% 17.3% 17.3%
Dow Jones Industrial Average -0.3% 7.2% 13.8% 15.4%
Nasdaq Composite 2% 14.4% 20.9% 20.2%
Russell 2000 – Smaller Companies 0.4% 6.5% 17.8% 17.1%
MSCI EAFE – International 0.6% -4.2% 12% 9.5%
Barclays US Aggregate Bond -1.7% 1.9% 1.8% 3.4%

Other highlights:

  • The best performing sector so far this year has been Healthcare, while Oil & Gas has been the worst.
  • After the final revision showed that GDP was negative in Q1, a modest rebound is expected to be shown for Q2.
  • While the markets wait for and anticipate the Federal Reserve implementing changes in short term rates, the bond market has been raising the yield on longer term rates as 10-year Treasury yields moved from 2.12% to 2.42% over the past 6 months.
  • The stock market has not experienced a 10% correction in over 3 years.
    • This was the first time since 2010 that the Dow Jones Industrial Average was negative for the first half of the year.
  • While interest rates in the U.S. remain poised to rise, about 20 of the 75 biggest economies have cut their rates this year. The impact of this dichotomy is a stronger dollar with downward pressure on commodity prices, inflation, and the earnings of U.S. companies that rely on exports.
  • The employment picture has brightened; the unemployment rate is now down to 5.3% though wage growth remains below its historical average.

The IPO market was active; with 70 for the quarter and 35 in June, which was the most since August, 2000.

As we look to the second half of the year, we continue to see the likelihood that interest rates will rise. While this does not signal the end of the world, we do expect it to lead to more market volatility as moving from zero to low on the way back to “normal” is likely to induce some bumps. Our current view is that volatility induced correction is one that is more of a buying opportunity than a harbinger of a market collapse.

Thanks for the opportunity to partner with you on your financial journey. Happy Trails.

Sincerely,
The Castle Investment Advisors®, LLC Investment Team

                    
 
Disclosures: 
Tax, legal, and estate planning advice contained in this article is general in nature. Always consult an attorney or tax professional regarding your specific legal or tax situation.
This article was prepared for informational purposes only and does not constitute an offer to buy or sell, or a solicitation of any offer to buy or sell the securities mentioned herein. Information presented does not involve the rendering of personalized investment advice, but is limited to the dissemination of general information regarding products and services. It should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the author as of the date of publication and are subject to change. 
Any strategy discussed herein may not be suitable for all investors. Before implementing any strategy, investors should confer with their financial advisor. No current or prospective client should assume that the future performance of any specific investment, investment strategy or product made reference to directly or indirectly, will be profitable or equal to past performance levels.