In 2022, Don't Predict. Prepare.
- Our focus is to guide investors through whatever challenges may come so that they can achieve their goals. We are not economists. We don’t predict. We invest. Our job is to prepare.
- Volatility, the rise and fall of prices, is inevitable, particularly over shorter time horizons. Rather, we aim to judiciously compound returns and avoid permanent capital impairment.
- We counsel careful consideration for investment goals, thoughtful portfolio selection, and periodic checks to ensure the portfolio is still a fit—meaning that goals or circumstances haven’t changed so much that a new portfolio is in order.
According to an old Yiddish proverb, “We plan; God laughs.” Wherever you fall along the spectrum of belief, that dynamic applies to investing as well, particularly for those who think they can time the market or reliably predict what returns they will reap and when.
Now, that is in no way meant to wrap up 2021 on a pessimistic note. Far from it, as the 12 months coming to a close mark the 10th double-digit gain for U.S. equities (as measured by the Morningstar US Total Market Index) in the 13 years since 2008.
However, in the fixed-income realm, U.S. core bonds lost modest ground as investors fretted about the prospect of rising rates and sustained increases in inflation over the coming year. Those investors may soon find themselves in a growing crowd as any number of worries begin to take hold, from the aforementioned rates and inflation to the suspicion that the unrelenting success of equities is a streak that must come to an end, making a pullback feel inevitable.
Risks abound, from those we can see now to whatever’s hiding around the corner. And the soothsaying game has left a long line of those who got it wrong in their wake, which is why we don’t play it. Instead, our focus is to guide investors through whatever challenges may come so that they can achieve their goals.
We are not economists. We don’t predict. We invest. Our job is to prepare.
We start with valuation, or the prices we pay for different asset classes. We aim to invest in opportunities, be they particular countries or sectors, when we believe they are priced below their fair value. Not unlike the post-holiday shopper seeking two-for-one sales in the Sunday circular, we want to get more for what we pay.
Next, we consider the market environment. We don’t fixate on one; we consider a range of eventualities. We consider how asset classes could behave in a prolonged period of high inflation, for example, or a sustained market sell-off due to a new and fast-spreading COVID variant. We test the potential for rising rates and their resulting impact on stocks and bonds, and even the possibility for the stock market’s prolonged rally to continue.
The idea is not to dodge every loss or snatch every gain. Volatility, the rise and fall of prices, is inevitable, particularly over shorter time horizons. Rather, we aim to judiciously compound returns and avoid permanent capital impairment, which is an inelegant way of describing losses from which an investment cannot recover. That is the most serious consideration for investors who have actual goals attached to their portfolios.
We believe that when it’s carefully implemented, a dual focus—a valuation mindset and an effort to balance the risks portfolios may encounter as market conditions evolve—gives us the best chances of seeing portfolios deliver on their objectives over the long term. Because again, we’re not trying to predict. We’re trying to prepare. We are not market timers.
Why not? Research repeatedly shows that attempts at market timing—to cash out and wait for happier times—will very often lead to worse investment outcomes. Counterintuitively, it can be a matter of missing the upside: studies show that while market timers may manage to miss some of the market’s losses, they rarely can foresee when markets swing back to gains, ultimately remaining in cash while the market grinds higher.
Rather than encouraging advisors and their clients to swing in and out of the market, we counsel careful consideration for investment goals, thoughtful portfolio selection, and periodic checks to ensure the portfolio is still a fit—meaning that goals or circumstances haven’t changed so much that a new portfolio is in order—and to ensure a good night's sleep.
In other words, let us worry about what’s next. Not as a matter of prediction but as a matter of preparation. That’s what we are here for, and we’re grateful that you’re with us to end one year and ring in a new one. We value you and your trust in our partnership, and we look forward to spending 2022 with you.
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