Principles and Methods: Deep Dive
We are long-term investors. A lifetime of successful investing demands that we be goal-focused and planning-driven. Market timing and investment selection are of minimal value in real long-term investing.
There can be moments—even moments that last years—where market-focused and performance-driven approaches succeed. But, ultimately, the evidence tells us that people who are successful over one period of time are AS LIKELY to be unsuccessful as successful in subsequent periods of time. In other words, there is NO EVIDENCE for the persistence of performance – no evidence that short-term decision making improves long-term outcomes.
Why? Because you can’t step into the same river twice.
We know that focusing on market-timing and investment selection as a way to “outperform” inevitably leads to higher costs, higher taxes, and – in most instances – underperformance over longer periods of time. But we forget that price and value are inversely correlated. We forget that “reversion to the mean” is a powerful financial force. We routinely fall prey to tinkering with portfolios to include more of those things that have done well recently. And we fall further and further behind on our goals never grasping that our pursuit of better timing & selection is at the heart of our problem.
In every market boom and market bust, there will be a small number of momentarily lucky outlier investors. “Momentarily lucky” because their current holdings happened to line up perfectly with current market conditions . . . this time. “Outlier” because they experience relatively spectacular short-term returns and create envy among the invested crowds. They will, of course, claim brilliance—everyone wants credit for their decisions—but their short-term outcomes are far more likely based on luck than any personal skill they have.
Those who wish to be successful for a lifetime need to act from a deep knowledge of their goals according to their specific plan and avoid continually reacting to economic and market “news.”
You are here because you want to adopt an intelligent process for funding your children’s educations, caring for your aging parents, creating retirement incomes you can’t outlive, and maybe—just maybe—leaving a legacy for your family or community. These goals will remain necessary targets far beyond the current news cycle. My greatest hope for you is that the nonstop noise of the financial media is reduced to a soft background hum in your life. While we can’t help but hear the hum, we should make no attempt to base investment decisions on it.
We know what we know. We don’t know what we don’t know. The future is impossible to predict, so we won’t attempt to forecast the economy or time the markets. No one can consistently project the future relative performance of specific investments, and we refuse to try. In a nutshell, we are planners, not prognosticators. We believe our highest value to you is threefold:
1. Our digital planning tools (the cone of goodness)
2. Our simple consistent portfolio process, and
3. Our eco-system of behavioral coaching designed to help you ignore the “noise”
Whether you start with our investment led track or our planning led track, you will have access to digital planning tools that allow you to line up a lifetime of milestones—home purchase, kid’s educations, retirement dates—and see whether you are on track with realistic expectations and saving enough money
. . . or need to make further adjustments to your plan.
Our portfolio process is consistent:
1. Asset allocation determined by your financial plan
2. Broad diversification (we own almost everything)
3. Long-term focus on balancing:
a. Global equities for return with
b. High quality fixed income for safety
4. Rebalancing (to keep portfolio in line with plan)
Once a client family has worked with our digital tools to put a long-term plan in place and funded that plan with the investments that seem historically best suited to achieving their financial goals, everything else comes down to staying the course. We very rarely recommend changing the portfolio outside of rebalancing. In brief, our principle is this: if your goals haven’t changed, don’t change the portfolio.
This is where the most difficult work begins. Once you have a plan and an appropriate portfolio, the dominant remaining variable is YOUR behavior. There is a very human tendency to get excited as markets go up and become despondent as they fall. It is okay to feel the feelings, but acting on them has been proven time and time again to be a bad idea.
Our eco-system of behavioral coaching is specifically designed to help you ignore the “noise.” No one can invest directly in an index, but the average annual intra-year decline of the S&P 500 is about fourteen percent if you look back as far as 1980. Yet, even without counting dividends, annual returns of the S&P have been positive for 29 out of these 38 years. Furthermore, the index has gone from 106 at the beginning of 1980 to 2,670 at the end of 2017.
We believe the most important lessons of investing can be drawn from those simple market data points. Every year gives us some form of temporary declines, but temporary market declines have historically not translated into a permanent loss of capital. Instead, the permanent loss of capital is the result of human action in response to natural market volatility.
The most effective antidote to this normal market volatility appears to be TIME. Notice how down years are usually followed by the biggest up years. Notice how often it happens. How can it be seen as anything other than normal?
The very nature of investing requires practicing rationality under uncertainty. We’ll never have all the information we’d like about what lies just around the bend. We are investing in and for an unknowable future. Therefore, we adhere to investment principles that have thus far yielded the most favorable long-term results over time: planning, rational optimism, patience, and discipline.
Whatever is happening right now will end. Something else will take its place. This too shall pass. We will be reminding you of this when you need to hear it most through our emails, blog, and videos.