What to Focus on When Investing for the Future

January 31, 2020

As we begin a New Year and a new decade, many financial experts are polishing their financial “crystal balls” in an attempt to predict what the market will – or won’t – do in 2020 and beyond.

The reality is that no one really knows how the market will perform from day to day, week to week or even year to year. That’s why it’s important to take a long-term approach to investing, so you can handle the periodic bouts of volatility – in either direction – and still keep your head.

 

New Year’s Resolution

Most New Year’s resolutions focus on what you can change or do differently. However, when it comes to investing, the best strategy is to hold steady for the long-term. Instead of making off-the-cuff changes or trying to pivot based on the latest headlines or market predictions, investors would be better off resolving to meet with their financial advisor in 2020 to review their overall strategy and risk tolerance. Take a strategic approach to your portfolio, which means setting an appropriate asset allocation and adopting a long-term perspective.

Why does taking a long-term approach matter? Because investors who are overly focused on short-term market moves act impulsively. Recent history offers an example. At the end of 2018, the stock market was down 20 percent in the last two months of the year, which led to concerns about what might lay ahead in 2019. By contrast, at the end of 2019, the S&P 500 was up more than 30 percent (assuming the reinvestment of dividends). Those who sold — as opposed to sticking with an investment process based on a well-defined plan — missed out on an impressive year.

It’s important to keep investment expectations realistic at both ends of the spectrum. After all, the returns we saw in 2019 are not sustainable on an annual basis and are highly unlikely to be a regular occurrence. In other words, 20 percent or higher annualized returns are not something a prudent investor should expect. The point is that investors should set themselves up emotionally to avoid being reactive every time there is a dip in the market.

It’s also critical to distinguish between process and outcomes to account for short-term variability. Sometimes, well researched and intelligent decisions won’t work, and sometimes flawed logic will still result in a winner — the equivalent of buying a lottery ticket. As investors, we don’t want dumb luck to give us a false sense of confidence in our abilities.

For that reason, we think it’s important for investors to make a clear-eyed review of their past investment decisions – good and bad outcomes alike. This part of our process allows us to take away useful insights from our past decisions and helps us to sharpen our sword.

 

Long-Term Strategy

Whether the market is up or down, the long-term investment strategy should largely remain unchanged. There are an endless number of “experts” out there waiting to tell you what the market will do in the immediate future, but we’ve found that their predictions are of little value (if many of them made meaningful bets based on their predictions of the past few years, they would be broke). That’s why it’s important to take the long view when investing, so you can ride out the volatility rather than trying to get one step ahead of short-term moves in either direction.

Ultimately, you want to put yourself in a position where you are able to weather the storms. Prepare to answer short-term market swings with confidence and presence of mind.

In his 2013 letter to Berkshire Hathaway shareholders, Warren Buffett noted: “American business has done wonderfully over time and will continue to do so (though, most assuredly, in unpredictable fits and starts). In the 20th century, the Dow Jones Industrials index advanced from 66 to 11,497, paying a rising stream of dividends to boot.”

The factors that have driven this attractive long-term performance for equities remain intact (and, for what it’s worth, the Dow Jones Industrials index is now north of 28,000). We recommend taking a long-term approach because it’s a proven path to financial success.

At The Fiduciary Group, we focus on constructing portfolios that enable our clients to maintain their asset allocations throughout the market cycle, especially during the stressful periods when it matters most. In other words, we accept the fact that we cannot predict bouts of volatility and, instead, devote our attention to preparing clients to weather changing market conditions.

For the past 50 years, we have worked to invest in financially sound companies with strong balance sheets that can withstand tough times. When it comes to investing, we endeavor to make intelligent, informed decisions. We look at the quality of a business and its management team. We want to invest in companies we understand and to work with people who are trustworthy and capable. Over the long-term, we want to invest in companies that we think will be generating significantly more free cash flow in the future than they are today.

We believe it’s imperative for clients to think about stocks as partial ownership of a business, as opposed to being pieces of paper that are endlessly shuffled back and forth among market participants. Over the long run, the outcome from an equity investment will ultimately be determined by the underlying results of the business. Whether the stock goes up or down 10 percent over the next year has no bearing – and often no relation – to the long-term success of the business. The ability to accept short-term market volatility with equanimity while remaining focused on what truly matters is critical to long-term success in investing.

 

Asset Allocation

We also believe in the importance of asset allocation and maintaining a diversified portfolio so that clients’ investment strategies are aligned with their future cash needs. We also focus on each client’s ability to bear risk and their capacity to withstand the swings that accompany changes in market values.

Individual client circumstances inform our investment decisions and directly influence the asset allocation in portfolios. Ultimately, our goal is to intelligently balance the mix of stocks and bonds to adequately capture the benefits they provide for investors while also remaining cognizant of their shortcomings.

Capacity to bear risk is based on quantitative factors such as one’s age, financial resources, and future cash needs. Willingness to bear risk, on the other hand, is qualitative in nature, unique for each person, and subject to change. It can differ drastically even for two individuals who are the same age with identical financial circumstances.

Willingness to bear risk can be more difficult to wrap your arms around, particularly in the midst of a decade-long bull market. At times like these, it’s imperative for clients to remember that the world of investing will not always be as rosy as it is today. Our objective is to set asset allocations so clients will have the conviction to stay invested throughout the market cycle.

Our experienced advisors can help you develop and maintain an appropriate long-term investment process. While each client has unique circumstances that determine the overall construction of his or her portfolio, an 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.

Short-term volatility is, on the most fundamental level, unavoidable. As investors, our strength lies in how we choose how we react to market volatility. We affirm our belief that a balanced, diversified approach helps our clients stay invested throughout market and macroeconomic cycles and puts them in the best position to achieve adequate returns over the long run.

Remember that the beginning of the year is an ideal time to meet with your financial advisor to make sure your plan is on track and to make any adjustments. As always, we greatly appreciate the trust our clients place in us. We work tirelessly to ensure that it’s deserved.

If you have any questions about your portfolio or our investment process, please let us know. On behalf of the entire team at The Fiduciary Group, we wish all of our clients a healthy and prosperous New Year!

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

AUTHOR:

ALEX MORRIS, CFA, MBA