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Long-Term Success

The late political scientist Edward Banfield of Harvard concluded after fifty years of research, that the single most accurate predictor of upward social and economic mobility in America—more important than family background, race, intelligence, connections or even education—is long-term perspective: the ability to think ahead through time.

Likewise, we would venture, the one trait an investor could adopt that would be the best predictor of future success, would be the ability to ignore the short-term volatility, and keep a long-term perspective. During the last calendar quarter, however, this was not easy.

Europe dominated the headlines and will likely continue to make news with sovereign debt challenges. There continues to be uncertainty regarding the expiration of Bush tax cuts at the end of the year and the ramifications for investors. We witnessed the anticipation and subsequent ruling on the Affordable Care Act by the Supreme Court along with speculation surrounding the economic impact. Plus, there has been the seemingly never-ending political jockeying of the parties that will last up until, and likely beyond, November. All of which contributed to a volatile second quarter. Thus, investors that focused primarily on short-term performance may have experienced a fair amount of stress and anxiety.

It is true that we have been through and continue to feel the effects of a global financial crisis. This crisis caused strains in the banking system of many developed economies and continues to cause knock-on effects today, particularly in Europe. The MSCI EAFE index, which tracks the collective stock market performance of large companies in developed countries outside the US, has declined by about 17% in the 12 months ending June 30th. It can make one wonder, just for a moment, about the wisdom of investing abroad.

For all its troubles, the world economy is still growing. The International Monetary Fund estimates global economic growth this year of about 3.5%, accelerating to 3.9% in 2013. For emerging and developing economies, the growth assumptions are about twice that.

The enclosed table Developed Market Returns ranks annual stock market performance in US dollar terms for eighteen different global markets (from highest to lowest) over the last twenty-five years. The colors correspond to the countries featured on the slide, and the patchwork dispersion of colors shows no predictable pattern. Over this period, the US market was never the top performer in any given year, until 2011. In fact, of all the countries displayed, the US market has performed in the bottom half in seven of the last ten years.

We understand as long-term investors that there are seasons and cycles in a diversified portfolio. Sectors, asset classes, countries and continents all have their seasons in the sun over time; and their downturns. Research continues to show that a patient, disciplined approach to investing as opposed to speculation and market timing, largely rooted in emotion, provides us the highest probability of success. As Warren Buffet once said…

“Look at market fluctuations as your friend rather than your enemy; profit from folly rather than participate in it.”

In spite of the turmoil visible through the financial media, rest assured we are working behind the scenes to proactively rebalance portfolios, monitor and manage the holdings, and to keep our clients on track with a thoughtful, prudent approach to investing so that they can increase their probability of long-term success.