The author F. Scott Fitzgerald once wrote that "the test of first-rate intelligence is the ability to hold two opposed ideas in the mind at the same time and still retain the ability to function."
This posture is important as we live with current volatility and await greater clarity in global trade negotiations.
The capital markets do a great job of providing a fair investment return for the long-term disciplined investor in a manner that doesn’t require much of the investor’s direct effort. This allows many capital market investors to spend their days generating value in the world in alignment with their unique talents and skills (vs. actively trading their portfolios).
While we accept volatility as part of investing in the capital markets– and we know this is a byproduct of the daily liquidity that the capital markets provide, prolonged periods without meaningful volatility can result in more pronounced reactions when it does return – and can test the investors patience and resolve. In these situations, it is useful to remind ourselves why we utilize the capital markets – typically, for the power of compounding – and often, for the passive cash flow that can be provided to us through a disciplined, diversified investment approach.
This is a hypothetical example and is for illustrative purposes only. No specific investments were used in this example. Actual results will vary. Past performance does not guarantee future results.
Diversification does not assure a profit or protect against loss in declining markets, and diversification cannot guarantee that any objective or goal will be achieved.
Market corrections can highlight quick shifts in performance – where underperforming sectors, styles and asset classes can suddenly surge to the top, and previous market leaders can fall out of favor (and vice versa). Diversification, then, remains the core of a healthy portfolio to protect against market corrections and underperformance, as no single asset class outperforms indefinitely.
When we ground portfolio construction with one’s long-term goals, and recognize the other financial factors at play for the investor, it becomes easier to maintain course through all parts of the economic cycle, because we know what future outcomes are being pursued, and how the investments inform the ability to get there.
Stocks and bonds provide one type of portfolio diversification, but these investments are not the only tools for robust portfolio construction.
In the portfolios we manage, we prepare for uncertain times in the way we design the investment mixture. We incorporate diversification within style, geography, asset class and other factors across both stocks and bonds – and, we utilize non-public investments when suitability exists (alternatives)– in order that we build risk-adjusted portfolios with differentiated sources of return.
Portfolio construction is the process of strategically combining a diversified mix of assets to achieve specific investment goals within an acceptable level of risk, balancing potential returns and minimizing financial risks. This process relies on historical information while also considering forward-looking risk/return estimates (Capital Market Assumptions), to understand if/when the metrics of our model components are changing as economic shifts occur.
Our approach to investing is model-driven, yet ultimately tied to the overarching goals (needs/wants) of each client. We develop “full picture” allocations – which include any investments that may be held away from our direct management - because it is better for the “total allocation” to meet mathematical parameters of good portfolio design, rather than to isolate the portion we direct, while leaving the whole overexposed- which can easily happen when the financial professional doesn’t look at how all assets interrelate.
When we consider non-public investments, we are primarily looking for additional diversification and/or return premia via low correlation to traditional stocks and bonds:
We recognize that market volatility and economic uncertainty can be emotionally jarring, even when your portfolio is well positioned and designed for the long term. Maintaining patience during periods of dislocation is often the most challenging part of investing in the capital markets, but consistency is key.
During these times, remember: if your liquidity requirements haven’t changed, you aren’t over-allocated to deployable cash, and you’re not losing sleep over the volatility, then it generally makes sense to stay the course. Looking back to WWII, we know that the average recovery time for market corrections is 4 months:
For those who are overallocated to cash (and the intention with that excess cash is to invest it at some point..) then taking advantage of uncomfortable market dislocations can prove beneficial over the long run vs. staying in cash - as the interest income earned on cash won’t always generate a positive return on your capital net-after-inflation:
Strategic allocation of resources and the velocity of money is ultimately what helps accelerate wealth accumulation. The capital markets can offer a fair rate of return in a relatively passive manner, but the most important components are strategy and time.
Therefore, in case you have friends/family who need good counsel – encourage them to follow your lead: work with someone they can trust, get clear on the outcomes they desire, build the investment engine in alignment with their risk tolerance, and then be consistent over long periods and the approach has the potential to reward. You are welcome to share our commentary with them, and they can subscribe to our newsletter here.
The Exceptional Wealth | Family Office team serves those who need sound, comprehensive, unconstrained guidance to simplify their wealth, their life and their business(es). Our job is to help you stay confident and focused on your long-term financial goals, and, help you understand how to adjust when your individual situation changes.
Life is dynamic, and the more you keep us informed of your situation, the better equipped we are to provide the personal solutions that help you go further, faster.