By The Advocates
The discipline it takes to be a prudent investor, especially during times of heightened uncertainty, has been a common theme in many of our conversations with clients lately. Emotions can run high; it is a natural response to find yourself tempted into taking action. The non-stop news cycle and the siren call of social media updates also help fuel this sense of urgency.
At times like these, we are often asked to share our insight on navigating challenging environments and what we’ve learned from many years in the investment management business. Here are a few things we believe investors can do to help instill a long-term mindset:
- Orient your thinking around the concept of lifetime investing. That’s the time-frame that is meaningful when you are investing over a lifespan or the multiple lifetimes involved in leaving a legacy for the next generation. Against that backdrop, the types of decisions you make and the actions you take would, and should, be different than those you would typically consider when planning for a shorter time-frame.
- Create and adhere to preset guidelines on when to take action and when to hold steady. We believe in the importance of finding an investment philosophy that resonates strongly with your values and goals and is grounded in sound investment theory. We have an investment philosophy and a set of values that guide our portfolio management through thick and thin. We may adjust our process from time to time based on new insight or significant developments in the investing environment, but we are always grounded in our fundamental investment beliefs and philosophy. We believe this discipline is a key component of the value we provide clients.
- Manage your news intake. The 24-hour news cycle has a downside. It creates a recency bias that can contribute to performance chasing. You may be tempted to give up too soon when an investment disappoints or become susceptible to “the grass is always greener” way of thinking. The result can be too much buying high and selling low. That kind of reaction eats into your returns, generates transaction costs and taxes, and is inconsistent with achieving long-term financial goals.
- Regularly review your investment philosophy and values, long-term goals, and risk tolerance with your advisor. This helps you internalize your goals and remain consistent in your process, so that thinking about investment decisions in this context becomes second nature.
Finally, think of our team as your sounding board and advocate, helping you weigh your natural impulse to act against your long-term goals, work through strategies, and keep your investment decisions and portfolio on track.
Asset Class Changes:
No Trigger Points have been hit this year. Last year we hit a trigger on January 14th when the S&P 500 fell to 1,907 and we incrementally increased your exposure to Large US Stock, Small to Mid-Cap US Stock, Foreign Stock and Emerging Mkt Stock. We then subsequently reduced our US exposure on 3/8/2016 when we hit a trigger at 2,075. Remember that our Trigger Points are updated monthly. Currently they stand at 2,407 to the upside (where we would trim US Stocks) and 2,019 to the downside (where we would add to US Stocks).
2017 Q1 Asset Class Thoughts
The buoyant mood that pushed stocks higher through year-end 2016 continued into the first quarter as signs of an improving global economy continued to mount. Stock indexes were up across the board. Emerging-market stocks were the star performers. Their double-digit gains eclipsed returns for developed international stocks (up 8%), and both outperformed larger-cap U.S. stocks (up 6%). For the first time in a while, global economic growth is in sync and improving. Corporate earnings estimates are being revised higher in both European and emerging-market countries, and sentiment seems to be turning positive, particularly in Europe.
In terms of our overall equity positioning, both our Europe and emerging-market positions were positive contributors to portfolio performance in the quarter. Across several metrics, U.S. stocks are the most expensive they have been in 50 years, with the exception of the stock market bubble period of the late 1990s. We don’t believe this time is different. We do believe valuation matters. When stock market valuations are high, the odds are your future market returns will be low. So we remain underweight to U.S. stocks in favor of foreign stocks, where there are tangible signs of an economic recovery underway in Europe, attractive valuations, and favorable corporate earnings trends in both European and emerging-market economies.
Managed futures and stabilizers play a key role in our portfolios as diversifiers, generating returns that don’t move in tandem with those of stocks or bonds. Our decision to invest in managed futures was based both on their significant risk-reduction benefits and on our expectations of positive returns over the long term. Of course, these portfolio protection benefits come with tradeoffs that can include periods of significant short-term volatility and sudden reversals. With returns that ranged from modestly positive to marginally negative during the first quarter, our managed futures and stabilizer funds are performing in line with our expectations and reducing overall portfolio risk.
We continue to stick to our discipline of basing our positioning on a five to seven year time frame, regularly revisiting our analysis, and keeping our focus on managing downside risks. We believe this is the best approach not only to investing, but also to building and maintaining wealth over time.
Investment results for various indices can be found below.
Global Market Indices Performance
Just For Fun: Single Country Stock Markets: First Quarter 2017
If you were to invest in any of these countries, hold onto your stomach, as all but 1 of the 8 is still more than 30% below its’ peak with the current drawdown for Nigeria at 77%!