To talk about tariffs, or not to, that is the question.” – Hamlet, Act 3, Scene 1

The past couple of weeks have been a whirlwind for global markets. On April 2nd, three months of careful thought and two hours of quality writing culminated in an esoteric market review on price changes and multiples. After April 3rd, that was the last thing people wanted to read. So instead, I’m going to briefly talk about what we saw in Q1 and then pivot to how your portfolio and financial plan are structured to weather many storms.

Q1 2025

The two themes for the first quarter were the decline of high multiple stocks (Magnificent 7: NVIDIA, Microsoft, Amazon, Apple, Tesla, Meta, Google) and investors finally seeing the benefits of a globally diversified portfolio. US stocks were -4.8% for the quarter, while international developed markets and emerging markets were up 5.8% and 2.9% respectively. Over the past few years, many commentators have fairly asked if there is a reason to have international stocks in the portfolio. My belief in global markets has never been predicated on a competitor to Amazon originating from Brazil, though we discount some of the impressive companies coming out of China to our own peril. Instead, there are times when US companies become very expensive relative to their international peers, and you can always run the risk of overpaying for a great company. And it can take a long time to get your money back after overpaying. For example, if you bought Microsoft in March of 2000, you didn’t breakeven until the early 2010s. Then you have Cisco, which if you had bought in March of 2000 would have taken until October 2024 to breakeven.

However, the story gets even more interesting when we examine why US stocks underperformed relative to international stocks in Q1. The table on the right provides us with some answers. While the S&P 500 was -4.3% for the quarter, the S&P 493 was almost flat at +0.5%. The Magnificent 7 companies dragged the index down with their negative performance. This masked US Large Value being up 2.14% with Warren Buffett’s Berkshire Hathaway leading the charge at +17.3%.

Tariffs

Back in the day one of the people who lived down the street from our family was a Vietnam veteran. When he learned I was joining the Army Reserves he asked what branch I was joining, and I answered I was going military intelligence. “Military intelligence?!” He laughed, “Don’t you know that’s an oxymoron?”

It’s an old and probably well-earned joke, but I think it’s a misinterpretation of what military intelligence does. The role of a military intelligence officer is to provide the best assessment of an area of operations to a commander and their staff. This includes assessing the enemy’s most likely course of action and their most dangerous course of action i.e. the worst-case scenario. The intelligence officer then works with the commander and staff to develop ways to counter the enemy using available resources to achieve the mission. Success is not dictated by being precisely correct about what the enemy is doing. Success is the creation and enaction of a plan that will achieve the mission across a variety of outcomes.

This is why we review the distribution of global market returns during our review meetings. It allows us to assess our area of operation (public markets), identify the most likely course of action (a positive year), and prepare for the most dangerous course of action (a significant drawdown). So, with that information, how have we prepared?

If you are retired or nearing retirement, anywhere from 30-50% of your portfolio is in bonds. We want bonds to cover 5-15 years of your forecasted spending needs in retirement. This means if you withdraw $40,000 per year from your portfolio, we want to have $400,000 in short-term bonds. There is a lot of time on the clock before we even consider touching the stock side of your portfolio.

If you have many years until retirement that means you can use your future years of employment to weather volatility. So, instead of market downturns being a risk to your retirement and well-being, they are a great buying opportunity. Good companies (purchased through diversified funds) are on discount!

Finally, whether you are retired or still working, we look for opportunities to seize the initiative. For those on a dollar cost-averaging schedule, with markets down -15% at one point, we took the opportunity to accelerate some of your investment. In other cases, with small value stocks being -20% for a day or two, we sold some bonds to purchase a class of companies that was, in our opinion, on sale. Tax planning also comes into play with tax loss harvesting opportunities and Roth Conversions: a decline in prices allows us to pack more shares into a tax-free environment.