Driving a Car Blindfolded
CRN-3580552-050621
Managing a portfolio is like driving a car blindfolded. It is impossible to know what twists and turns lie ahead. Most portfolio managers try to guess whether it will be a sharp right, a sharp left, when to speed up, and when to slow down. Even the most skilled analysts miss the mark more often than not. Our approach is different. We work to understand the lay of the land, and then determine the speed that will get us through anything that could come our way, given your personal tolerance for those bumps and turns.
Day traders use daily and weekly data to make decisions. Tactical managers are looking to monthly and quarterly data. We are strategists, using data that is more predictable on a relative basis, such as the business cycle, reversion to the mean and forward-looking effects. We look out to the horizon, typically 5-10 years when forecasting. History has proven again and again that it is impossible to consistently predict what is going to happen in the next 1-3 years. We don’t play that game and you shouldn’t either.
Our method is more practical than the alternatives, but it is still not an exact science. Trying to determine how far through the business cycle we are is like trying to determine how many more miles the car will last. By the time they hit the news, GDP, unemployment, inflation and earnings are all a reflection of the past.
Over time, the landscape of capital markets fluctuates, which is why we make changes along the way. These changes are not drastic. They are not supposed to be. Though they may seem small sometimes, our dynamic changes in shifting weight between asset classes along the way can have a significant impact on your long-term performance.
Shocks to the market occur from time to time. If they were predictable, then they wouldn’t have nearly the impact that they do. The fact that they are unpredictable means we need to adjust to their existence – not naively try to predict them. It is easy to look at previous market shocks and assign causes and warning signs, painting a clear picture of what happened. In the moment, we don’t have the luxury of that level of clarity.
In our most recent shock, the market bottomed out on March 9, 2009. From that point, the S&P 500 has now quadrupled.1 If you are strictly measuring investment performance relative to the S&P 500, then bonds, alternatives and international equities have held us back since then. It is times like these that investors are tempted to get away from these investments and step on the gas. Few saw 2008 coming, and there is no telling when or where the next market shock will strike.
From the peak in 2007 to the bottom in 2009, the S&P 500 lost 56%. Per Morningstar, it took a portfolio of 100% equities 4 years and 5 months to fully recover. 50/50 portfolios dropped 34%. They climbed back to even in only 2 years, 8 months.2 Portfolios with managed futures fared even better, as the managed futures index was UP 13.9% in 2008.3 The reality is, many investors were so battered emotionally during that time that they let their very dangerous instincts get the best of them. Some still haven’t recovered.
It is unlikely the next market shock will be as dramatic – but it is highly likely that you personally have a lot more to lose next time.
Our job is not just to get you from point A to point B as fast as possible, but to make sure we are providing a comfortable ride. Hopefully the ride is so comfortable that you can look out the window and enjoy the scenery along the way. This has been our approach from the start. It has not changed. Simply stated, our job is to get you all the way home.
1Source: JPMorgan Guide to the Markets, June 30, 2018
2Source: Morningstar Direct. 10/9/07 – 3/13/12. Diversified portfolios represented by LFN Model Portfolios, rebalanced annually.
3Source: BarclayHedge.com. https://www.barclayhedge.com/pr_jan_20_2009/ Managed futures index represented by Barclay CTA Index
Opinions presented may include forward-looking statements that are subject to certain risks and uncertainties. Actual results, performance, or achievements may differ materially from those expressed or implied. CRN-3580552-050621
