2023 Third Quarterly Letter

By David K. MacLeod, CFP®, CFA

Enclosed are your investment reports for the third quarter of 2023. The following table shows the total return performance of select market indexes for the past year, the last 5 years, and the last 25 years. The 5-year and 25-year numbers are annualized.

We think investors are susceptible to making a couple of mistakes in the current market.

For aggressive investors, it’s tempting to chase after recent returns in U.S. technology stocks. The stock prices of these technology stocks are extremely high relative to earnings and cash flows. This doesn’t necessarily mean the technology sector will crash like it did in 2000-2002. But we do expect lower returns going forward from this sector compared to the extraordinarily high recent returns.

For conservative investors, it’s tempting to allocate too much to short-term Treasury bills and CDs. This is an excellent idea for those with too much money sitting in the bank earning next to nothing. However, Treasury bills and CDs are a lower return asset over the long run than other fixed income sectors.

It’s worth highlighting a J.P. Morgan study of previous Fed interest rate hiking cycles. In the past 40 years, after short-term interest rates peak, the broader bond market typically performs better than 6-month CDs in the following 12 months. We don’t know when the Fed will stop increasing interest rates, but the market appears to believe that another rate hike is unlikely in the current cycle.

Our investment style emphasizes diversification, fundamentals, and a long-term approach. We have seen time and again that asset classes eventually revert to their long-term averages. We expect U.S. small cap and international stocks, and diversified bonds, to do better going forward.

We sincerely appreciate working with you. Please do not hesitate to call if you have questions about the enclosed reports or any other area of your personal finances.