Paul Meloan – Vested Interest

The presidential election was certainly a political shock to the nation and may very well have powerful repercussions through the economy and financial markets. That does not mean we know what they are, or could reasonably react to them before they happen.

When Oscar-winning screenwriter William Goldman (Butch Cassidy, All the President’s Men) said the quote that our title is based on, he was referring to the movie business. Finance proves the same thing time and again. We think, we suspect, but we do not know.

Forecasting future events in finance is a fool’s errand, one in which we have never attempted to engage. We see no reason to begin now.

Smart financial planning means being able to roll with the punches, even ones we do not see coming. In the last 50 years alone markets have dealt with political scandals and turmoil far greater than this. The markets have suffered losses partially in response to them. Each time this has happened the markets have recovered in time and gone on to greater heights.

What does history teach us?

If nothing else, global capitalism has proven itself far more resilient that we give it credit for. The same can not be said for investors. When people say that they are ‘risk averse’ what they usually mean is that they are ‘loss averse.’ The bigger risk for a long-term investor doesn’t come from the chances the market will decline 10-50% this year. The bigger risk comes from the prospect of missing the next 100-300% increase that will surely follow it (eventually).

Some recent history may be in order. From peak to trough (Oct, 2007 to March, 2009) the S&P 500 dropped 58% in price. From that bottom until 5 minutes ago it has gained 226% in price. Which do you think cost long term investors more: being invested during the down-swing, or missing the recovery? Someone contemplating a retirement of 30 years or more has far more to lose by missing long term market gains than from experiencing temporary losses.

Finally, whenever in doubt (which is always!) we refer clients back to financial fundamentals. It’s vital to have the proper balance of cash and other non-volatile assets like bonds in your portfolio to permit your portfolio to ride out volatility. Perhaps you should also rebalance into asset classes that are temporarily depressed. Cash and bonds do not have the long term growth prospects of stocks, but they are great for giving confidence to deal with stock market volatility.


Paul Meloan is the co-founder and co-managing member of Aegis Wealth Management, LLC, in Bethesda, Maryland USA. Before Aegis Paul was a practicing attorney as well as working in the tax practice of Ernst & Young, LLP.

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