Investing Principles

Posted on October 13, 2018 by Gemmer Asset

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Every once in a while it’s good to re-examine why you do the things you do.  Over the past few days the markets hit a bit of a rough patch.  Nothing catastrophic, just a bit more volatility than we’ve grown accustom to.  Times like these are perfect for revisiting basic investing principles, taking a step back and looking at the big picture.  With that being said, we thought this blogpost would be a good opportunity to revisit some of the big picture ideas investors should be focusing on.  Rather than get deep into the weeds, we’re going to outline our 30,000 foot view of a few main investing principles.

 

Diversification

This is the big one.  A well diversified portfolio can do wonders for long-term investors.  Benefits include:

 

  • Helping your portfolio capture what global markets offer
  • Reducing risks in your portfolio that have no added benefit (i.e. no expected return)
  • May prevent you from missing opportunities
  • Smooths out some of the bumps
  • Helps take the guesswork out of investing

 

Each one of these benefits could be the subject of their own blog post, but lets take a minute and focus on a few in more detail.

 

“May prevent you from missing opportunities” – Attempting to pick winning stocks in a concentrated manner year after year is tough.  Even if pick some stocks that outperform, not holding other winners can be devastating to returns.  The chart below shows what returns would have been over the past 25+ years if you 1) owned all global stocks;

 

 

2) missed out on the top 10% performers each year; and 3) missed out on the top 25% of performers each year.  These results are pretty dramatic.  Failing to pick the top 10% of performers each year nets you less than half of the return as the whole market.  The message here is: the easiest way to not miss opportunities is to own a greater share of the global markets.

 

“Helps take the guess work out of investing” – piggybacking off of the point we just made, diversification can help take out some of the guess work with investing.  Look at the chart below.  It shows the year-by-year returns of several major asset classes and ranks them from hi to low.

 

 

Often times an asset class is on top one year, only to be towards the bottom the following year (see international Small Cap, REITs, US Small Caps, etc).  Diversification by design should be somewhere in the middle, consistently.  This type of path leads to a “smoother ride” for your portfolio.

 

Avoid The Emotional Rollercoaster

Emotions get the best of us all sometimes.  Investing is no different.  Diversification can’t stop you from panic selling and taking your entire portfolio to cash at the wrong time.  Often times there is an emotional rollercoaster that occurs with investors that looks something like this:

 

 

This is a reactive cycle of excess optimism and fear, leading an emotional investor to buy and sell at the wrong times.  This type of “reactive” investing leads to poor outcomes.

 

 

The above chart shows just how poor those outcomes can be.  If you invested $1,000 in the S&P 500 in 1990, you’d have $13,739 by the end of 2017 using a buy and hold strategy.  Now lets say you tried to time the top of the market and missed the single best day… you’d have $12,313.  A nearly $1,500 difference on a $1,000 original investment for missing 1 day in a 27 year period.  Miss the 5 best days and you end up with $4,600 less than the buy and hold strategy.  The main point here? Just stay invested and don’t try to time the market.

 

OK, what about the big market events?  Real crises.

 

 

This chart shows most of the major crises over the last 30 years.  The bars represent the performance of a 60/40 strategy 1, 3 and 5 years after each event.  In every single case the portfolio’s return 3 and 5 years after the crisis is substantially higher than when the event occurred.  It’s easier said than done, but the bottom line here is to just wait it out.  The markets will recover, they always do.

 

Focus On What You Can Control

Investors have to sift through a lot of noise these days, particularly when volatility picks up.  In times like this it’s incredibly important to focus on what you can control:

 

  • Creating an investment plan with your advisor to fit your specific needs and risk tolerance
  • Structure a portfolio aligned with your investment plan
  • Diversify globally
  • Manage expenses, turnover, and taxes
  • Stay disciplined through market dips and swings

 

To sum it all up, create an investment plan you’re comfortable with, diversify and don’t make major investment decisions while you’re riding the peaks and troughs of the emotional rollercoaster.  Turning off the financial news channel on your tv may help too…

 

Click here for further reading on where investors can go wrong.

 

 

 

Published by Gemmer Asset Management LLC The material presented (including all charts, graphs and statistics) is based on current public information that we consider reliable, but we do not represent it is accurate or complete, and it should not be relied on as such. The material is not an offer to sell or the solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be illegal. It does not constitute a personal recommendation or take into account the particular investment objective, financial situations, or needs of individual clients. Clients should consider whether any advice or recommendation in this material is suitable for their particular circumstances and, if appropriate, see professional advice, including tax advice. The price and value of investments referred to in this material and the income from them may fluctuate. Past performance is not a guide to future performance, future returns are not guaranteed, and a loss of original capital may occur. Fluctuations in exchange rates could have adverse effects on the value or prices of, or income derive from, certain investments. No part of this material may be (i) copied, photocopied or duplicated in any form by any means or (ii) redistributed without the prior written consent of Gemmer Asset Management LLC (GAM). Any mutual fund performance presented in this material are used to illustrate opportunities within a diversified portfolio and do not represent the only mutual funds used in actual client portfolios. Any allocation models or statistics in this material are subject to change. GAM may change the funds utilized and/or the percentage weightings due to various circumstances. Please contact GAM, your advisor or financial representative for current inflation on allocation, account minimums and fees. Any major market indexes that are presented are unmanaged indexes or index-based mutual funds commonly used to measure the performance of the US and global stock/bond markets. These indexes have not necessarily been selected to represent an appropriate benchmark for the investment or model portfolio performance, but rather is disclosed to allow for comparison to that of well known, widely recognized indexes. The volatility of all indexes may be materially different from that of client portfolios. This material is presented for informational purposes. We maintain a list of all recommendations made in our allocation models for at least the previous 12 months. If you would like a complete listing of previous and current recommendations, please contact our office.

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