Focus on Process — Not Always the Outcome

May 31, 2019

It’s tempting to make investment decisions based on previous performance. When the stock market is continually moving higher, as it had for most of the past decade, investors sometimes overlook the importance of process. But, as we all know, the stock market can be fickle. For that reason, whether the market is rising or falling, it’s critical to have a sound process in place.

The end of 2018 is a timely example. After a huge decline for the S&P 500 in the fourth quarter, there was a palpable sense of concern among investors. Those who sold — as opposed to sticking with an investment process based on a well-defined plan — have missed out on an impressive start to 2019 (as of writing, the S&P 500 has increased by roughly 16% for the year). Reacting to short-term swings in market volatility, as opposed to accepting them and preparing for their inevitable occurrence, is a very difficult way to succeed in investing.

In their book Winning Decisions: Getting It Right the First Time, J. Edward Russo and Paul Schoemaker discuss how business owners (and investors) must make decisions in a time crunch and without complete information. In addition, they note that looking at outcomes can be misguiding — sometimes well researched and smart decisions won’t work (bad luck), and sometimes flawed logic will still result in a winner (the equivalent of buying a lottery ticket).

So, given this reality, how can you consistently and successfully make investment decisions? We think the appropriate answer is to ditch short-term predictions and strive for an appropriate asset allocation that can be maintained at all points throughout a market cycle.

This approach is rooted in several core beliefs. One, short-term moves in market prices are unpredictable. Two, the long-term trend for market prices is higher. For long-term investors, the real risk is getting spooked by temporary volatility and potentially missing years of returns.

Becoming overly focused on short-term fluctuations in market prices, as well as the short-term impact of unknowable macroeconomic and global political developments, is a fool’s errand. Consider just a few of the issues that have been front and center over the past few years: the U.S. debt ceiling, the Eurozone crisis, Brexit, and endless concerns about China’s economy. Along the way, commentators have persistently but incorrectly predicted impending doom for the economy and the stock market.

Someday that will change. The issue is that these market downturns are unknowable, both in terms of their severity and their duration. That’s why it’s imperative that you put yourself in a position where you are able to weather any storm. Prepare to answer short-term market swings with confidence and presence of mind as you focus on maintaining a long-term perspective.

At The Fiduciary Group, we look to invest in financially sound companies with strong balance sheets that can weather tough times. When the tide goes out, those companies are in a position to continue building value for our clients by improving their competitive position (through internal investment and M&A) as well as by repurchasing their own shares at attractive valuations.

An experienced advisor can help you develop and maintain an appropriate long-term investment process. While each client has unique circumstances that dictate the construction of his or her investment portfolio, a financial advisor can help you understand what to expect over the course of the market cycle as well as the benefits and shortcomings to any strategy.

The reality is that short-term volatility is unavoidable. As investors, our strength lies in how we choose how we react to it. We affirm our belief that a balanced, diversified approach helps our clients stay invested throughout the cycle and puts them in the best position to earn attractive returns over the long run.

Need help developing an effective investment strategy? Please reach out to us to get started.

AUTHOR:

ALEX MORRIS, CFA, MBA