Background
Formally defined by Merriam-Webster, an investment is “the outlay of money usually for income or profit.” Generally intended to meet financial objectives years into the future, the act of investing is consequently a long-term endeavor. Despite this fundamental understanding, investors of all levels of sophistication spend a great deal of time and energy focused on short-term events and outcomes. A recent blog post by Behavioural Investment provides a fairly exhaustive list of reasons explaining why this phenomenon persists and argues how it often leads to emotional decisions that can make investors worse off.
Average Returns Typically Elusive
Investors today have access to a tremendous amount of data describing both real-time and historical market observations. Future expectations are often approximated using the trailing average annual returns of a given asset class. However, with risk being a prerequisite for higher returns, the range of possible returns around this average is often under-appreciated. For example, the S&P 500 has delivered calendar year returns say within +/- 2% of the average annual return of 10.1% in only six years since 1926. Over the past decade, investors have actually been rewarded with seven years in which this key domestic benchmark exceeded its 10.1% long-term average. When the range of potential outcomes is broad, becoming overly focused on short-term results can be imprudent.
Thoughts on Recent Market Volatility
Despite a bounce in the final days of an otherwise punishing December, risk-assets experienced a highly volatile fourth quarter that more than wiped away the gains of the first nine months of the year. The MSCI All Country World Index shed approximately 9% in 2018, and many global equity markets entered “bear market” territory as they traded more than 20% below prior highs. Bond yields and the US dollar have come down, but this has offered limited solace given the magnitude of the equity market sell-off. Although identifying a specific catalyst is difficult, it’s reasonable to suggest that recent volatility may be more technical (low market liquidity, declining confidence) than fundamental (slowing global growth, uncertainty over trade) in nature.
When Cash Outperforms Everything
The Federal Reserve has hiked rates nine times in the tightening cycle that began in December 2015. While the future path/pace of monetary policy is a topic of much debate, past actions have meaningfully improved the returns for risk-averse (or perhaps opportunistic) investors holding cash. 2018 was the first time in over 40 years that we’ve seen cash outperform both stocks and bonds. This could be considered one of the unusual periods when diversification didn’t work.
Our Position
Even as markets remain vulnerable to external shocks, economic fundamentals do not suggest a recession will occur in 2019. Staying calm during a downturn is a critical quality of any long-term investor. Behaviors drive results and performance setbacks often challenge strategic clarity. Although not always easy, adopting a genuinely long-term approach to investing is one of the few real edges any investor can hope to exploit. Periodically, it seems as if everything is working against planning and discipline, but more than a century’s worth of data shows that diversified market exposure works. After reviewing long-term goals and objectives, we will continue to consider rebalancing portfolios into risk assets whenever pessimism is being priced into markets.
Disclaimers: The data contained in this report is provided from Asset Consulting Group (ACG). This is not an offer to buy or sell securities. No investment process is free of risk and there is no guarantee that the investment process described herein will be profitable. Past performance is not indicative of current or future performance and is not a guarantee. In preparing these materials, we have relied upon and assumed without independent verification, the accuracy and completeness of all information available from public and internal sources. Gryphon Financial Partners shall not in any way be liable for claims and make no expressed or implied representations or warranties as to their accuracy or completeness or for statements or errors contained in or omissions from them. This was created for informational purposes only. Gryphon Financial Partners, LLC is a Registered Investment Adviser.