A Q3 Letter to Clients: How to Navigate Rough Waters

October 7, 2014

by Dan Richards

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Each quarter I post a template for a client letter, as a starting point for advisors who want to send clients an overview of the three months that just ended and an outlook for the period ahead. Advisors tell me they get a great response to these letters.

Use as much of the content below as is appropriate for you, keeping your letter as short as possible. Be sure to customize the letter to reflect your views, especially when it comes to recommendations for the period ahead.

Here are the components of this quarter’s letter:

  1. An update on performance
  2. Context and perspective on recent macroeconomic events
  3. Lessons from history
  4. Recommendations for the period ahead

“When feeling seasick due to rough waters, keep your eyes on the horizon”
? Advice for passengers on ocean liners

As we enter the last quarter of 2014, I’m writing to summarize market performance since the start of the year and to share my thoughts on positioning portfolios given market turbulence arising from recent geopolitical events. I’ll also share three principles that have led to solid performance in the past, which are at the core of my approach.

Despite turbulence in the last half of September, U.S. and global stock markets built on the very positive returns of 2012 and 2013. Note that very strong performance in the last quarter of 2013 boosted twelve month returns.

2014 Returns – Local Currency

U.S.

Europe

Emerging Markets

World Markets

Q1

2%

2%

0%

0%

Q2

5%

3%

           6%

5%

Q3

1%

0%

1%

1%

2014 to date

8%

5%

6%

7%

12 months to Sept 30

19%

       11%

           9%

       15%

Source: MSCI

This strong performance came in the face of headlines dominated by big-picture economic and political uncertainty:

  • The Ebola epidemic threatening parts of West Africa
  • The resurgent movement of religious militants in Iraq and Syria
  • The bellicose Russian leadership and political tensions in the Ukraine
  • The concern about slowing growth in China, with particular focus in the last couple of weeks on political unrest in Hong Kong
  • The continued struggles in much of Europe to achieve sustained growth, with unemployment continuing to pose challenges

Given this uncertainty, a couple of clients have recently asked if they should sell stocks. In light of that, I want to recap three principles that guide my approach to constructing portfolios.

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