WE Invest

The Investment Puzzle

The media, your neighbors, even many advisors like to hinge on one attention-grabbing news story at a time; inverted yield curve, trade, oil, the DOW – but each story is just a piece of a puzzle. We’ve said it before, investing is as much art as it is science. While you might invest for the long-term, the very short term can have dramatic impacts on your long-term goals. Just ask anyone who was planning to retire between 2007-2011. If you planned to retire with an average life expectancy of another 20 years you would have been invested in a moderate portfolio of about 40/60% stocks and bonds respectively. It is also likely given the greed leading up to 2008 that many investors and advisors alike were taking more risk that just 40% in stocks. Moderate Allocations were down significantly, for example, the S&P 500 Target Moderate Risk Index was down 33% in 2008 (source: Morningstar). It would take those investors to hold still and not panic, remaining invested until 2011 to get back to their high balances. Most investors didn’t stay invested. Many are barely getting back to those levels today, 11 years later.

You see, regardless of your time horizon the short-term puzzle we try to solve as portfolio managers can have great consequences. We call this Sequential Risk, the risk of the timing of returns. Like those planning to retire, if you need your money to last 20 years and plan to live from that money, the risk that you have a significant drawdown right as you retire can have dire consequences. Those same investors above that might have retired at market highs in 2007 and started taking 4% distributions are just seeing their balances reach 2007 highs in 2018! It literally took 10 years and a bull market.

Today the puzzle pieces are very difficult to put together. The global economy is in a recession and the US is opaque at best. Many pieces of economic information are good, not many are great. Many are deteriorating.

Beyond economic information, there is geopolitical risk around the world including erratic policy in the US, Middle Eastern tensions, Brexit, Europe, and China trade. It would be remiss to ignore the heightened political situation unraveling globally. We have seen these extremes before in history. Unfortunately, it’s a very scary history. The gap in wealth and income continues to create and escalate populous tensions from the right and left.

The future also looks very bright. We are in one of the most dynamic technological revolutions in history. Change is so rapid; most people barely see it let alone understand it. It’s just happening in real time. From CRISPR and the human genome, to deep learning and artificial intelligence, to FinTech and Digital Wallets, Robots, 3D printing, Batteries and autonomous networks – just pick one and learn why the future is exciting, scary, and not so distant.

It is unlikely any one of these stories or data points will be the reason for an imminent recession, but it is undeniable that the probability of a recession and a stock market correction goes up daily. In the meantime, the market will climb, and investors will deny economic reality and chase the market higher. The solution isn’t to panic, go to cash, or time the market. Instead, we manage the overall risk of our portfolio downward. Surely, missing some of the upside but preparing to help protect some of the drawdown and position our clients to better take advantage of the opportunities as they present themselves.

We believe you should be cautious, you should be skeptical, and while you shouldn’t panic make sure your advisors are diligent.

Eddy Augsten – WealthEngage

The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of the author, and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor's results will vary. Past performance does not guarantee future results. Future investment performance cannot be guaranteed, investment yields will fluctuate with market conditions. The investment profile is hypothetical, and the asset allocations are presented only as examples and are not intended as investment advice. Please consult with your financial advisor if you have questions about these examples and how they relate to your own financial situation. The S&P Target Risk® Moderate Index is one of four multi-asset class indices that compose the S&P Target Risk Series. The S&P Target Risk Moderate Index offers significant exposure to fixed income, while also increasing opportunities for higher returns through equities.