Broker Check

January Client Update

January 2, 2018


“My First Bitcoin”

Happy New Year!  As I write this letter, I look back on 2017 as having been a great year for the markets as global economies grew beyond most observers’ expectations.  Today, the first trading day of 2018, the S&P 500 closed at yet another record high as investors’ appetite for growth and risk assets accelerated.  The momentum seems to be driven by a combination of fiscal stimulus from tax cuts and global economic growth. Both are providing new market liquidity; as well as renewed optimism driven by positive employment news.

Here is how our globally diversified portfolio performed in 2017.  The aggregate equity portfolio (representing 49% of the total portfolio) returned 22.94 percent for the one-year period ended December 31, 2017.  The results by category and best performing individual funds were:

The equity categories have current dividend yields of 6.1%, 5.1%, 4.7% and 6.7%, respectively.  It is important to note that equity portfolio dividends are paid monthly, quarterly or annually.  The dividend cash flows are essential in meeting both distribution needs and “buy low” portfolio strategies. 

The aggregate income portfolio (representing 51% of the total portfolio) returned 7.01 percent for the same one-year period; not bad considering the current low interest rate environment!  The results by category:  Bond and CD ladder 3.42% and Alternative Income 13.00%.  Note that the Alternative Income gains represent a combination of dividend yields ranging from 4.1 percent to 10.7 percent; with an effective yield for the category of 5.8 percent.  

When the above results are aggregated, the net aggregate portfolio return for 2017 was 13.75 percent.  For accounts that are primarily invested for long-term growth, the individual returns were up to three percent more than the average.  For accounts that are primarily invested for distribution, the individual returns were as much as two percent less than the average.  In both cases, the results reflect the portfolio allocations; a combination of risk tolerance and current cash flow requirements, as well as a desire to preserve principal in many cases. 

As long-term investors, we need to look back over the last five years of our returns, gain   perspective and apply this in 2018 and beyond.  The chart below will help with that analysis:

In 2014 and 2015 when virtually the entire world was suffering from the global economic slowdown, the negative equity returns represented unrealized losses from temporary valuation declines in high quality positions that recouped their underlying values in 2016 and 2017 as global economies began to grow.  More importantly, the five-year average returns reflect more normal, longer-term expectations.

This is where I need to get “nerdy”.  (Remember I am a recovering CPA!).  I will avoid references to the Greek alphabet used to analyze investment risks and returns.  When, we talk about equity returns we need to consider long-term valuation norms.  First, equity valuations are based on corporate earnings and economic growth expectations. Consider the historic data:  We know from studying the history of our markets that markets do tend to “revert to the mean”.  What that tells us is that at current P/E multiples of 18.2x, and based on historical trends, we can expect both one-year and five-year returns to decrease as valuations return to the 16.0x range.  Having said that, over the last year we have made tactical changes to our equity portfolio allocations by reducing domestic equity allocations in favor of increased international, alternative and global equity investments.  We are already seeing the benefits of these tactical changes as illustrated on page one.  However, we do expect volatility to return to all markets and that active investment management will continue to rule the day. 

We continue to get questions about the current Bitcoin craze.  Here are some quotes from a number of respected investment professionals on this cryptocurrency that surged 1,300 percent in 2017 before declining 25 percent from the high over the holiday week:  “Avoid like the Plague”; “Just a Joke”, “Manipulation by a Small Number of Investors”; “the SEC is watching”.  From our perspective, the cryptocurrency phenomenon may well foretell a world-wide currency that our grandchildren may see in a future that does not value currencies with an underlying intrinsic value; based on any one country’s economic strength or any underlying asset (e.g.- gold).  For a historic example of one such currency Ponzi scheme, you should Google Tulip Mania:  When Tulips Cost As Much As HousesAfter reading that almost unbelievable account, you will see why we have no plans to add Bitcoin to our portfolio.

As always, please call either James or me if you have any questions.  If you have friends or family who could benefit from our services please contact our office.


Intelligent Investment Management, LLP

Stephen Wheeldon,