Timeless Investment Truths in Uncertain Times

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By Brian Tall

When times seem uncertain, it is always helpful to revisit the longstanding investment truths that guide our decision making.

2020 Market Volatility

Which truths are most important for investing in a bear market?

Average Returns Don’t Come Every Year

History shows that equity investors have enjoyed a long-term average return of 10 percent, despite one in every four years producing a negative outcome. But, knowing that down years are inevitable, we can plan ahead by protecting near-term cash needs in high-quality fixed income.

Markets Decline in Good Years, Too

It would not be unprecedented to see a ~30 percent intra-year decline in a calendar year the subsequently ends positive. That is not a prediction, but an observation that it has happened before.

Investment Returns Revert to Average

Regression to the mean is the idea that abnormally good or abnormally bad conditions do not last forever. Things eventually move toward an average, much like the temperature in a room controlled by a thermostat. In recent years, we trimmed profit from market segments that enjoyed above-average returns for an extended period of time. And, as we are in the midst of a significant market decline, we can look for opportunities to replenish exposure to depleted positions.

Time Transforms Risk

Few ideas in the investment world are as widely accepted as the notion that risk and return are positively related—that without accepting higher risk, the possibility of higher return is not available. But, it is only when we invest over a sufficiently long period of time that we begin to see higher-risk investments dominate lower-risk investments. That is why we set a 15+ year time horizon for our global equity positions.

Capital Markets Discount Information

Employers have begun instituting work-from-home policies, local governments are prohibiting large gatherings, sports franchises are competing without fans in attendance, business conventions and concerts have been canceled, and travelers have postponed vacations. All this activity, or lack thereof, points to a potential recession in the months ahead. Having declined nearly 30 percent from the peak to Thursday’s low, global stock markets have already priced in the expectation of an economic slowdown.

Predicting the Future is Hard

If we could predict the timing and impact of recessions, natural disasters, or a broader category of man-made disasters, there would be no need to diversify capital across asset types, geographies, sectors, and companies. The idea of diversification is borne out of recognition that the future is likely to evolve differently from what we expect at any given moment.

Market Leadership Rotates

Rebalancing portfolio exposures—the act of selling outperformers and replenishing underperformers—is one of the most difficult things to do from an emotional standpoint. Sometimes, rebalancing can take years to pay off. But, as the saying goes, you can either rebalance yourself, or wait for the market to rebalance for you. By periodically rebalancing client portfolios, we can reduce the severity of market pullbacks.

Read the full list of uncontroversial and unbiased truths that guide our decisions and shape our investment philosophy.

Brian Tall serves as the chief investment officer at Brighton Jones. 

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