“It’s tough to make predictions, especially about the future.”
The world lost a great philosopher in September. Legendary Yankee Yogi Berra passed away at the age of 90, having appeared in 14 World Series – 10 of which the Yankees won. Yogi-isms like the one above have an uncanny application in the business of advising clients on the management of their wealth, mainly because of the common sense they convey. Given the current market environment, we’ve honored Yogi in this commentary by sharing some of his most famous quotes in relation to current market conditions and – more importantly – how investors should be responding:
“You can observe a lot just by watching.”
Over the past two years, returns on balanced global portfolios have been lackluster. We’ve seen many periods like this in the past where diversified portfolios experience a 2, 3, or even five year period of lukewarm performance. During these times, it’s critical for long term investors to embrace the following “do’s and don’ts” to avoid making costly mistakes:
- Do revisit and review your overall asset allocation to make sure it still fits your long term planning and your risk tolerance.
- Do remember that there are plenty of times in the past where your mix of assets treaded water, but patience was typically rewarded with growth over the long term. (Two years isn’t long term; 10-20 years is.)
- Don’t “do something” just to do something. For instance, don’t increase your portfolio’s risk to try and get higher returns unless you can stand the increased fluctuations.
- Do ask yourself this question: Has there ever been a 10-15 year period in history where my mix of assets didn’t deliver a satisfactory result for my objectives? (If you want us to help answer this question, give us a call.) If your answer is “no,” why on earth would you waste another moment trying to read the tea leaves or make ill-timed adjustments to your portfolio?
“It’s like déjà vu all over again.”
Some of the financial journalism geniuses have opined that the current market and economic environment are scary. That, somehow, “it’s different this time.” What nonsense. What’s different now than in the past is that today we have 24/7 news assaulting us from every device we own, as opposed to the three – and only three – television channels we had when we were all growing up. The news isn’t any better or worse today than it was then – there’s just more of it raining down on us. As for the markets themselves, August handed us our first real correction in 4 years, with US markets declining about 13% from the high point to the low. The talking heads couldn’t wait to crow that (with apologies to Red Foxx) “this is the big one.” Then, October delivered a splendid rally in prices. How many times must we see the same thing over and over before we believe it the next time it happens, too?
“It ain’t over till it’s over.”
The desire to just “do something” means you might do something wrong. As noted earlier, we’ve had plenty of times throughout history where two, three, even five years of mild returns were followed by a period of robust returns. Judging your results on a short period of time is neither useful nor helpful. If history tells you you’re doing the right thing based on long term historical results, why would you take the chance that doing something different might work?
“The future ain’t what it used to be.”
Once again, we’d like to call your attention to this table of asset class returns since 2000. What this shows conclusively is this:
- No one can accurately predict what tomorrow’s top and bottom performing investments will be. It’s completely random. You should, therefore, own them all in varying amounts. When you do this, you neither make a killing nor get killed.
- When you’ve diversified accordingly, history reflects you’ve achieved reasonable returns over time without all the drama or the rollercoaster ride. In fact, look at the white box labeled “50%/50% mix” (that’s 50% offensive assets and 50% defensive assets). Over the 14 year period 2000-2014, such a portfolio not only outperformed the US equity market, but it did so with roughly half the risk of US equities.
(click for larger view)
A final word on this: Yes, US equities have had a good run for the past three years compared to a broadly diversified portfolio. (You can see this on the chart.) But remember, no one knows which investments are tomorrow’s winners or losers. For those clients who are either riding their winners concentrated in the US, or (worse yet) piling into US equities, the chart would suggest you do so at your own peril. Diversify.
“If the world were perfect, it wouldn’t be.”
Fact is, nobody knows what the immediate future holds for the investment markets. When it comes to investing, you can’t predict, but you can prepare. Preparing means diversifying against any possible outcome that could upend your long range financial plans. By definition, diversification means there will be periods of time where you may be frustrated with lower overall portfolio returns. The past two years are a good example of this. But the virtues of diversification are proven out over decades, not a couple of months or even a couple of years. The history shared above proves that conclusively.
See you next month.