Insights
Investing with a Big Picture Perspective
An ancient parable tells of three blind men who encounter an elephant along the road. One touches the pachyderm’s belly and declares the obstacle to be a wall. The second man touches its leg and argues it’s more of a pillar. The third man grasps the tail and says, “Why, it’s a rope.”
Making investment decisions in reaction to particular current events is a lot like trying to identify an elephant through a single touch. The facts may be accurate, but they can still mislead you in reaching the right conclusion.
Jumbo-sized financial crises happen. Whenever they do, investors tend to become jittery, especially as we’ve grown highly sensitive to the noise generated by all the recent market volatility. That’s why I feel that one of my most important duties as your investment advisor is to ensure that you are continuously armed with the defensive tools you need to fend off the kind of fear and emotions that are generated whenever apocalyptic headlines trumpet bad news. Because, I’m sorry, but it will happen again. Business cycles repeat themselves. The global economy swings up and down. Investment markets respond with adjustments ranging from incremental to enormous.
Throughout, you should maintain an investment strategy based on how markets have delivered their returns over time. As my client, you’ve probably heard these themes before, but it’s essential to keep them in plain sight.
In the long run, things are looking up. For at least the last 80 years, which is as far back as reliable data goes, our stock and fixed income (bond) markets have been in a steady long-term upward trend. Because a picture speaks a thousand words, I’m including a visual of that, below.
To capture long-term market growth, you must look past the short-term fluctuations. As you’ve witnessed yourself, steady, long-term growth does NOT mean constant growth. Bear in mind:
- Periodic declines will occur, some minor and brief, some longer and more serious. While the serious declines have occurred about every five years on average, nobody has been able to predict precisely when or how long they might last, nor when it’s safe to “get back in the water.”
- My recommended investment strategy thus focuses on the big picture: seeking to earn an investment rate necessary to reach your own well-planned financial goals.
- To that end, it’s possible to design a diversified portfolio specific to your needs, which has the best chance of earning the investment rate of return you seek. But …
- To capture the upward market trends and reach your investment goal, you must subject yourself to the declines. You must ride them out.
You are a long-term investor.
But what if our past guiding principles such as diversification and asset allocation are no longer right? Perhaps it’s human nature to fear that this crisis, this political climate, this time … it’s different. Let’s review why that is highly likely not the case and why we remain true to our existing strategy.
Market ingredients remain in place. First, I believe we will continue to experience a steady upward economic trend over time, because all the necessary ingredients remain in place. Crises may come and go, but the constants remain: capital, resources, skilled labor, functioning legal and governmental systems, and the freedom and innate human drive to improve ourselves. In the U.S. and in more countries as time passes, these pieces of a stable economy are in place, bringing us and our loved ones financial and personal satisfaction.
Political climates come and go. Still, I’ve had quite a few conversations with clients this year about whether the U.S. is moving in a direction that might stifle future growth. Perhaps because our perspective of current government policy is large and looming, it’s easy to lose sight of the reality that there have been many examples of similar government interventions in the past. To cite just a few:
- During World War I, President Woodrow Wilson had the federal government assume control over the entire railroad industry for more than two years.
- In the 1930s, the Roosevelt administration established government-funded power plants in direct competition with private producers.
- Not to pick solely on Democrats, you may recall Republican President Nixon’s price and wage controls.
Somehow, our stock market has survived all of these events and many others. So have the markets in countries whose governments have been even more interventionist than our own — such as Sweden, whose market has returned 12.8 percent annualized returns since 1970, compared to U.S. annualized returns of 9.1 percent during the same period.
I’m not suggesting that government policies have zero impact on market returns, but when you analyze the entire elephant, so to speak, the data clearly indicates that government policy has been a relatively minor part among the overall body of influencing factors.
To capture market returns, you must stay invested in the market. Yes, markets must be expected to periodically decline. But it’s relevant today to view past declines in hindsight. The subsequent bull markets have lasted longer than the bear markets, and delivered gains that were disproportionately greater than the bear market losses. Looking back at the 13 bear markets since World War II, we are 13 for 13 on that count. We are 47 for 47 if you go back to the founding of our country.
At the same time, the precise timing of both declines and subsequent recoveries has always been an unknown. Consider recent events, when the CEOs of Lehman Brothers and Bear Sterns didn’t see it coming. They personally lost $1 billion between them and they were in the middle of it. Alan Greenspan didn’t see it coming, despite his access to economic wisdom, the best and brightest advisors and the most sophisticated modeling techniques. Bottom line, there are just too many economic variables at play to be able to predict the outcome of each day in the life of the market.
We see no reason to expect the next decline and recovery cycles to be any different, which is why it’s essential to remain invested for when the recovery occurs. If you can maintain this perspective, you will better fend off any fear caused the next time the markets decline and the news media is proclaiming the next end of the world as we know it. Just remember that:
- The long-term market trend is upward, despite continuous upsets along the way.
- The markets and economy can be expected to eventually right themselves — often dramatically and almost always without any warning.
- When the unpredictable recovery does occur, you’d better be there for it if you want to stay on track.
Repeat after me: You are a long-term investor.
