“The future has a way of arriving unannounced.” – George Will
One of Foster Group’s core principles is that while we remain long-term optimists regarding stock market returns, our short-term view is more “agnostic”, meaning that we don’t believe there is credible evidence that anyone can know with any certainty whether the coming 12 months will be positive or negative ones for investors.
However, that does not mean that our experience as investors is totally out of our control. On the contrary, there is strong evidence that good decision-making based on sound research raises the probability of long-term investment and financial success. So, if the next 12 months of daily market swings are out of our control, what are those things within our control on which we should focus?
- Invest in winning markets. The global stock market can be sub-divided in a number of ways. Three helpful ways to separate the market into asset classes involves sorting stocks between value and growth, small and large companies, and companies that are profitable or unprofitable on a cash-flow basis. The best peer-reviewed evidence indicates that stocks of value, small and profitable companies have higher expected returns and could be the “winning markets” in the future.
- Win in the markets invested in. How we participate in these potentially winning markets is also under our control. We can choose the traditional stock-picking and market-timing method (not good), we can rely on index funds (better) or we can use an asset class approach that reliably gets the full asset class return, with the possibility of market-beating performance through patient trading, attention to price momentum, tax management and cost control (best!).
- Take advantage of global opportunities. While US stocks, as a whole, have outperformed foreign stocks in the past five years, this has not always been the case. From 2000 to 2005, as the US stock market was falling sharply, foreign small company stocks and real estate had very positive years, providing needed diversification benefits to investors. Today, almost 50% of the investable stock market universe and more that 65% of the investable bond market is comprised of foreign issuers, providing an important diversification opportunity.
- Stay invested. In times of uncertainty, investors have a tendency to both hold onto excess cash as well as to sell investments that may not be performing well. The risk of these approaches is that investors will miss out on positive returns when they do occur. Positive stock market returns tend to occur suddenly as opposed to smoothly over long periods. This can be referred to as the “Must be present to win” principle. By selecting an appropriate, long-term investment allocation (for example, 60% stock and 40% bond) and staying fully invested and rebalancing to that allocation at all times, investors avoid the risk of being absent when the invariably unannounced positive days and weeks occur (see graph).
- Pay attention other planning priorities. Reviewing life, disability and long-term care insurance coverages, updating wills, trusts and beneficiary designations, accelerating debt repayment, tracking lifestyle spending so as to better project future retirement cash flow requirements are among the important planning practices that are within our control every day.
While we wish we could control stock markets, interest rates and inflation, the fact is we can’t! So, in 2016, rather than worry about things we can’t control, let’s focus our energy on the things we can control, putting our families and organizations in position for long-term success.
PLEASE NOTE LIMITATIONS: Please see Important Disclosure Information and the limitations of any ranking/recognitions, at www.fostergrp.com/info-disclosure/. A copy of our current written disclosure statement as set forth on Part 2A of Form ADV is available at www.adviserinfo.sec.gov.