Dear Clients,

I hope this letter finds you in good spirits as we embark on a New Year. With this letter I wanted share with you some of my thoughts, broken into two parts:

Part One: General Principles

• It will be worth reiterating, in the context of this annual letter, the nature of my philosophy of advice. Generally speaking, my experience has been that successful investing is goal-focused and planning-driven, while most of the failed investing I’ve observed was market-focused and performance-driven.

• Another way of making the same point is to tell you that the really successful investors I’ve known were acting continuously on a plan — tuning out the fads and fears of the moment — while the failing investors I’ve encountered were continually (and randomly) reacting to economic and market “news.”

• Most of my clients — and I certainly include you in this generalization — are working on multi-decade and even multigenerational plans, for such great goals as education, retirement and legacy. Current events in the economy and the markets are in that sense distractions of one sort or another. For this reason, I make no attempt to infer an investment policy from today’s or tomorrow’s headlines, but rather align clients’ portfolios with their most cherished long-term goals.

• I don’t forecast the economy; I make no attempt to time markets; and I cannot — nor, I’m convinced, can anyone else — constantly project future relative performance of specific investments based on past performance. In a nutshell, I’m a planner rather than a prognosticator. I believe my highest-value services are planning and behavioral coaching — helping clients avoid overreacting to market events both negative and positive.

• My essential principles of portfolio management in pursuit of my clients’ most important goals are fourfold. (1) The performance of a portfolio relative to a benchmark is largely irrelevant to financial success. (2) The only benchmark we should care about is the one that indicates whether you are on track to accomplish your financial goals. (3) Risk should be measured as the probability that you won’t achieve your financial goals. And (4) investing should have the exclusive objective of minimizing that risk to the greatest extent practicable.

• Once a client family and I have put a long-term plan in place — and funded it with the investments that seem historically best suited to its achievement — I very rarely recommend changing the portfolio beyond its regular quarterly rebalancing. In brief, my principle is: if your goals haven’t changed, don’t change the portfolio. My unscientific sense is that the more often people change their portfolios, the worse their results become. I agree with the Nobel Prize-winning behavioral economist Daniel Kahneman, when he said, “All of us would be better investors if we just made fewer decisions.”

• Going back to 1980, the average annual intra-year decline in the S&P 500 has exceeded fourteen percent. Yet even without counting dividends, annual returns have been positive in 29 of these 37 years, and the S&P Index has gone from 106 at the beginning of 1980 to 2,647 at year-end 2017. I believe the great lessons to be drawn from these data are that — historically, at least — temporary market declines have been very different from permanent loss of capital, and that the most effective antidote to volatility has simply been the passage of time. I can’t predict that it will always work out this way. I can only fall back on the wisdom of the great investor and philanthropist John Templeton, who said that among the four most dangerous words in investing are: it’s different this time.

• The nature of successful investing, as I see it, is the practice of rationality under uncertainty. We’ll never have all the information we want, in terms of what’s about to happen, because we invest in and for an essentially unknowable future. Therefore we practice the principles of long-term investing that have most reliably yielded favorable long-term results over time: planning; a rational optimism based on experience; patience and discipline. These will continue to be the fundamental building blocks of my/our investment advice in 2018 and beyond.

Part Two: Current Observations

• A year of global growth. The year 2017 was most noteworthy to me in that for the first time in this century, all the major economic basins of the world were growing simultaneously, albeit at different rates. Before this, at different times, Europe or Japan or the emerging markets dealt with significant headwinds, and growth here at home was plodding and sluggish. I regard the synchronization of global growth as a somewhat underappreciated positive that is continuing.

• The U.S. accelerates — and feels better about it. Steady if unspectacular hiring has driven the unemployment rate down to 4.1% for two months at this writing, putting the economy on track for a potential third straight quarter of 3% growth — a breakout of sorts. The consumer, by all important measures, is feeling better about things than he has since before the Great Recession, and retail sales are quite robust. Household net worth in the fourth quarter may have reached $100 trillion, and consumer balance sheets continue healthy. Business investment is accelerating at long last. These trends, too, are continuing as we enter the new year.

• The Federal Reserve begins normalizing. In my opinion the Federal Reserve has been behind the curve of this recovery, and that it should be unwinding its bloated balance sheet and letting interest rates follow their normal course in an expanding economy. This it began to do in 2017, so far without ill effect. I’ve said to you that the economy was accelerating not because of the Fed but in spite of it, and I persist in that belief.

• A genuinely great year for equities — with muted volatility. With a total return of 20.9% for the S&P 500, and the deepest intra-year price decline a mere three percent (versus the average, since 1980, of 14%), our philosophy of staying the course was well rewarded in 2017, with a bare minimum of volatility. We are, as you know, long-term equity investors who know that markets can’t be timed. We remain positive on the equity market for the coming year. All of that said, I can’t imagine returns in 2018 will match this year, or that volatility will remain this quiescent. Equity investing isn’t often as easy as it was this past year.

As I always say — but can never say enough — thank you for being my clients. It is a genuine privilege to serve you.

—Michael Paulding Thomas

• Past issues of my Client Newsletters
• Read my Financial Checklist & Service Model.
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^{Securities offered through Innovation Partners, LLC. Member FINRA/SIPC}