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2016: Surprising Events, Predictable Lessons Learned

2016 was an interesting year, filled with many outcomes that none of us would have predicted this time last year. Dimensional Fund Advisors' Wes Wellington summed it up well in his own year-end review.

"Every year brings its share of surprises. But how many of us could have imagined that 2016 would see the Chicago Cubs win the World Series, Bob Dylan receive the Nobel Prize in Literature, Donald Trump elected president, and the Dow Jones Industrial Average close out the year a whisker away from 20,000? The answer is very few—a lesson that investors would be wise to remember."

If you are interested in seeing how the markets responded to the unfolding news (hint: often in equally unexpected ways), the data-driven results are in

As usual, many forecasts were made. Many investors speculated on which sectors, stocks, countries, currencies, commodities, or bonds would outperform. Or they tried hiring gurus to do this for them.

Whether you are a do-it-yourself investor or turning to an "expert" who says he or she can forecast the future for you, the evidence strongly suggests that such attempts are an uphill battle. As 2016 showed us in spades, what we think is going to happen is never a sure bet. To add to the steepness of the challenge, how the markets react to what does happen is, if anything, even less predictable. In short, speculation isn't an investment strategy as much as it is a long-odds gamble, and your hard-earned wealth is what you're using as your stakes.

"Active" versus "passive" are the classic labels for speculative versus evidence-based investing. In the latter, we side with the academics on how the markets are expected to deliver their long-term returns and suggest you position your investment portfolio accordingly.

The tug of war between active versus passive was frequently in 2016 headlines, such as in this Bloomberg interview with Vanguard Founder John "Jack" Bogle. Bogle started the first publicly traded index fund in 1976, and continues to lead the "revolution," with rallying cries such as "The math is the math."

We seem to be making headway too. Some reports show that billions of dollars have been flowing out of actively managed funds and into low-cost index-like funds. Check out this example, and this one.

We hope you become an evidence-based investor as well, avoiding speculation and seeking an advisor to help you build and maintain a practical diversified portfolio, tailored to your unique situation.

You may wonder what such a practical portfolio would look like. I'm glad you asked! Here are several characteristics we emphasize:

Taking a long-term view: Your asset allocation is mostly determined by your own long-term investment goals and needs for cash flow - not by forecasts on what the markets are going to do in the next few months or even the next few years.

Embracing global diversification: Instead of trying to pick which stocks or sectors are going to win and lose in the near-term, we favor an approach that gives you broad exposure to wide swaths of the stock markets, balancing your stock market risks with a measure of bond investments, and sticking with that approach over time.

Minimizing investment costs: Invest in low-cost, passively managed mutual funds and ETFs, and manage your overall portfolio with an eye toward minimizing wealth lost to taxes.

Remaining true to your investment plan: This of course suggests you have a custom-crafted plan to begin with. You then stick to your plan by consistently rebalancing back to your target allocations if market movements significantly alter the make-up of your portfolio. We wrote about rebalancing here, if you'd like to know more.

Last but not least, if structuring your portfolio seems a little daunting, it can be even more challenging to remain true to your plans from one year to the next. This is where a fee-only advisor who has your best interests in mind can have your back when you may second-guess your decisions. If we can help you with that, give  us a call!

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