Dear Clients and Friends:
We know that you are dealing with many challenges at this time but please know that we are here to support you in any way that we can. With the recent volatility in the markets, we did hear from several clients who wanted to know “what they should do? ” given the market conditions. With that in mind and our research over the years on behavioral finance we wanted to reiterate our investment approach in the context of some of the more emotional aspects to investing that nearly all of us experience. Above all, take care of your health and be safe!
For most of our client needs, our investment approach is decidedly long-term where we are trying to take advantage of economic, consumer and business trends that have staying power. For example, in our view, current interest rates will stay lower for longer causing us to focus on different areas of the bond market and limit our exposure to bonds that will likely react negatively when interest rates eventually rise. We have also tried to take advantage of growth trends in certain real estate sectors, such as warehouses (that benefit from increased online shopping), apartments and storage spaces (both of which have some correlation to continuing urbanization and downsizing trends in our country). These are a few examples of the types of long-term trends that we believe are structural in nature with solid demographics that we can logically understand and implement into a cohesive investment thesis.
We are constantly researching the investing landscape with a wide variety of sources such as investment conference calls and face-to-face meetings with market specialists to verify and/or challenge our approach. The objective is to deliver the best outcome for you and make adjustments as needed. Throughout all of this, we will adhere to a well disciplined approach that has sound reasoning behind all of our investing decisions.
What we have generally tried to avoid, are current trends that we can’t fully understand or don’t believe have lasting staying power. These include ideas such as the latest crypto currency ‘opportunity’ or the IPO’s of companies with no clear path to profitability. That’s not to say that the technology underpinning some of these trends are not real. However, recall how long it took for us to go from some of the initial internet devices and related dot-com hype of the late 1990’s, until 10-15 years later when these technologies matured into widespread availability, usage and corresponding sales and profits. Too often, we have observed the herd approach that is fed by the current news cycle, often on our mobile devices, either all positive or all negative, represented by the graphic in the upper right.
And speaking of mobile devices, we believe the proliferation of the 24/7 news cycle combined with “free” stock trading on investment platforms, leads many investors to trade too often thinking they can out-guess millions of people trading that same day. That, combined with the huge increase in computer driven quantitative trading, often in EFT’s that slice up the market in ever smaller subsets, has resulted in unprecedented stock market gyrations especially in the final hour of the trading day. We hope more investors can recognize that such a short-term investment approach based on current news items leads to emotional decisions. Natural fight or flight responses trigger investors' need to "do something", instead of more rational decision making processes based on a solid assessment and a long-term plan.
It’s during times like these we are reminded of the importance of good investor behavior, and toward that end the following questions may help you assess your situation:
Do you have a financial plan that you’ve generally been following? Do you have savings and a cash reserve set aside for emergencies? Are you spending less than you make? If still saving for financial independence, do you have free cash to consider investing now? If retired, are you living within a sustainable cash flow? Are your investments diversified, and do you perform periodic rebalancing?
If all these boxes are checked, investors should look at moments like these as opportunities. Asset prices have declined, allowing us to purchase some of the best in class investments at a substantial discount to just a short month or two ago. Unlike 2008, the current soundness of the US financial structure gives us comfort that the markets will eventually rebound once the current virus direction is much clearer. No investment program will guarantee against downturns triggered by large shocks to the economic system, but we believe our overall approach is sound. Making a realistic assessment of your situation, including your emotions, may help you stick to your long-term plan in the midst of life’s uncertainties.