Why a Financial Plan Matters More Than Market Predictions

Greetings!

It is hard to believe we are halfway through the year.

I am seeing more predictions start to take place about what the market will do for the remainder of 2024 or what effect the election will have on the markets.

I find this quote helpful: "There are two kinds of forecasters: those who don't know, and those who don't know they don't know"

General Principles

I make it a habit to re-read our investment philosophy at the beginning and mid-point of the year. To me, these are timeless truths about successful wealth management that are helpful to be reminded of from time to time.

We are goal-focused, plan-driven, long-term investors.

Our portfolios are derived from and driven by your lifetime financial goals, not from any view of the economy or the markets.

We do not believe the economy can be consistently forecast, nor the markets consistently timed.

We do not believe it is possible to gain any advantage by going in and out of the markets, regardless of current conditions.

We therefore believe that the most efficient method of capturing the full compound return of the investment markets is by remaining fully invested.

We are prepared to ride out the investment market's frequent, often significant, but temporary declines.

We believe that even during downturns, our reinvested dividends and/or ongoing contributions will be buying more lower-priced shares—and that the power of compounding will be continuing to our long-term benefit.

As you may be aware, the investment markets have done quite nicely not only last year but also in the first half of this year.

During the good times, while I consider myself the eternal optimist, it’s important to be reminded that downturns are to be expected at some point. That is why the 2nd to last bullet point is important.

We. Are. Prepared.

We are prepared to ride out anything the market can throw our way. That is why having a plan in place can save you from making the grave mistake of getting out of the markets at the wrong time.

Current Commentary

The first six months of 2024 can be simply but accurately summed up in two observations. (1) The U.S. economy continued to grow, however modestly. (2) The equity market—responding to accelerating earnings growth and dividend increases—did very well.

Economic growth remained marginally positive, continuing to avoid recession, while job growth continued relatively strong. Inflation slowed very grudgingly, providing the Federal Reserve with no urgent prompting to reduce interest rates.

Monetary policy remains gently but quite firmly restrictive—that is, the fed funds rate is well above the inflation rate—as I believe long-term investors should want it to. Getting inflation down to the Fed's target two percent remains Job One.

Even without stimulating rate cuts, the equity market advanced solidly across a broad front: all three major stock indexes are significantly into new high ground. The impetus for this has been just what it fundamentally ought to be: strengthening earnings and rising dividends. Bloomberg's current estimates are for the S&P 500's earnings to be up something like 8.8% this year, to be followed by a further 13.6% increase in 2025.

Even though cash dividend payments to shareholders are at record high levels, S&P 500 companies are still paying out a below-average percentage of earnings (about 37% versus the average for the last 30 years of nearly 46%). Between that and sharply increasing earnings, there would appear to be quite a bit of room for further dividend growth this year and next.

Earnings and dividends are the variables that ultimately drive the long-term value of our core investment asset: ownership equity in a broadly diversified portfolio of enduringly successful companies. Not the national debt; not the looming election; not the presence or absence of Fed rate cuts; not war(s); not the onset of the next regularly scheduled government shutdown “crisis.”

I continue to believe that the more we focus on the fundamental strengths of our core asset, the more we're able to tune out the noise, and the less danger we will be in of emotional overreaction to gyrations in “the stock market.”