Broker Check


| July 17, 2018

Every day we are inundated with attention-grabbing headlines from financial news sources, the writers of these headlines use catchy puns, fear, or the reader's curiosity to get clicks and views. Sometimes, the news stories that accompany the clickbait headline contain relevant information and truly newsworthy information. So what should we do when a story breaks?

We hope that the following might be helpful, it’s in response to a question about speculation on why one factor “X” might impact the market, and should we sell because of “X.” The critical point is how the long-term multi-factor macroeconomic environment looks, which include a data point: the unpredictability of human influence. 

One of the most important investment lessons I have learned over the years is reliably predicting the future of a system like the markets is impossible, and I would take it a step further to say arrogant.

Those who do introduce unnecessary randomness and risk, which we know over the long term is harmful to results. This type of gambling/investing is part of why I have seen portfolios underperform so dramatically in the past. I blame almost all of it on the financial media, of which I too am a huge consumer of. The get rich quick ads with babies and janitors day trading don’t help either. You have to take it all with a grain of salt, much of what is out there is simply not material. In the end, the media is really just trying to sell laundry detergent and cars, and they know nothing sells like fear.   

It's tempting in this environment (and all of them really while living in them) to take just one factor and make predictions that seem to make sense. 

This single factor path is a recipe for disaster. We need to include other factors like corporate earnings, taxes, interest rates, unemployment, exchange rates, commodity prices, population growth, industrialization of emerging economies, geopolitical issues, manufacturing, consumer behavior, housing prices, consensus assumptions about the future, and thousands of other inputs that all go into the current market values. 

All of the factors that are already known are priced in, what isn’t known or can’t be predicted cannot be valued.

Instead of depending on one thing to potentially add or subtract hundreds of thousands of dollars in unnecessary risk to your family’s net worth, your portfolio is already positioned to account for the unknowable future. 

Our plan when the market drops significantly is not to panic. This approach is easier said than done of course, but you should take some comfort in knowing that we intentionally construct your portfolio with defensive positions and an allocation to bonds for unpredictable events. Now your bonds can go down, but I included a chart from Blackrock that shows how a bad year for bond tends to be like a bad day for stocks. The absolute worst year in history for bonds was negative 3%. 

Now it’s worth noting that on average the stock market drops over 14% annually from top to bottom. I think that since this market has done so well for so long, that a drop of 25% or more is likely the next time we get a big one. But we had a scary 19% drop in 2011, and if we had changed course, we would have missed out on not only all of the recovery of the 19% but the subsequent 13% and 30% return the following two years. 

Since your safer assets should be relatively unimpacted during drops, this should allow us to weather storms. In fact, even the worst stock market crash since 1929, the market was back to even in five years. The crash before that was seven. Yes, some people may have gotten lucky and timed it perfectly but when I look at the actual black and white numbers of not only regular investors but also professionals, actively getting in and out, experienced below average returns. 

So instead of trying to gamble on outcomes from various factors, taking the long view is the wiser path.  We plan for your portfolio to last for multiple decades and invest accordingly. We own a variety of positions across industries and market caps in the US, and throughout the rest of the world. This way, if we have poor performance in a particular part of the portfolio, you aren't put at unnecessary risk. 

Please let us know if you would like to discuss and have a great day!


This article represents opinions of the authors and not those of their firm and are subject to change from time to time, and do not constitute a recommendation to purchase and sale any security nor to engage in any particular investment or legal strategy. The information contained here has been obtained from sources believed to be reliable but cannot be guaranteed for accuracy.