Data, Worries, and Expectations

By: Matt Garrott

We are often asked, particularly by prospects, for investment ideas – something outside the box that goes up like a stock and protects on the downside.  All they want is 10% annual returns with no negative years.  No such thing exists or we’d have been trick or treating in St. Bart’s last week.

However

Right now (when the market is volatile) is when the real investment gains are made.  Ok, maybe we won’t see actual gains, but part of long-term investment success is avoiding permanent losses.  For many investors this occurs during these volatile times when they panic and deviate from their investment plans.  Success can come just from sticking to your financial plan (I hope you have one).  It’s not sexy.  You don’t need a star manager, a room full of PhDs, or a high frequency trading algorithm.  I have yet to come across a financial plan that says sell every time the market dips 10%.  On the other hand, I’ve heard plenty of folks who are sitting on cash say that they will put it to work as soon as the market doesn’t look so expensive, you know, if it drops 10% or so.  Not many follow through on that intention, saying that now that the market has dipped, the market is too weak to invest in.  They remind me of the Yogi Berra “Nobody eats there anymore, it’s too crowded” quote.

To bolster the idea of following a prudent financial plan, let’s look at some data and contrast the worries that flit across the airwaves with what we can realistically expect going forward.

Data

Inflation is in line or slightly below Federal Reserve targets.  Unemployment is extremely low.  The Federal Reserve’s dual mandate is being fulfilled and Fed Chairman Jay Powell sees this as paving the way to normalizing interest rates.  US GDP which had been predicted to never grow beyond 2% is actually growing at over 3%.

Worries

Financial journalists get paid to fantasize about what could go wrong.  Here’s what you’ve probably been hearing:

  • Jay Powell says we’re still a long way from neutral rates meaning more rate hikes
  • “Trade wars”
  • US Mid Term elections
  • “Markets in Turmoil” (see this month’s Scorecard for market returns after “turmoil”)
  • The charts look just like 1987 (you can always find some joker saying this)

Expectations

Rather than trade in reaction to the day to day speculation of fearmongers, we build portfolios based off what is likely to happen in the long term.  Investments will trend up over time.  No one can know the timing or magnitude of these movements, which is why diversification is so important.

Fear of missing out and regret are human nature and stem from a perceived lack of control.  While we cannot control the markets, we can control our own behavior.  Diversification and rebalancing lead to better decision-making and ultimately better outcomes.  Market timing and reacting to short-term market movements may feel good in the moment, but they tend to erode wealth significantly in the long-run.

Fairway Scorecard 10-31-2018