As the year comes to a close, we thought that it would be of value for us to lay out for you, our valued clients, our thoughts on investing.
Our experience has been that successful investing is goal-focused and planning-driven, while most of the failed investing we have seen was market-focused and performance-driven. Another way of making the same point is to tell you that the really successful investors we’ve known were acting continuously on a plan—tuning out the fads and fears of the moment—while the failing investors we’ve encountered were continually (and randomly) reacting to economic and market “news.”
Our clients are working on multi-decade and even multi-generational plans, for such great goals as education, retirement and legacy. Current events in the economy and the markets are in that sense distractions of one sort or another. For this reason, we make no attempt to infer an investment policy from today’s or tomorrow’s headlines, but rather align clients’ portfolios with their most cherished long-term goals. We make no attempt to time markets; and we cannot—nor, we are convinced, can anyone else—consistently call short-term moves in the markets. We believe our highest-value services are planning and behavioral coaching—helping clients avoid overreacting to market events both negative and positive – and identifying great companies and determining their intrinsic value.
Our essential principles of portfolio management in pursuit of our clients’ most important goals are:
- The only benchmark we should care about is the one that indicates whether you are on track to accomplish your financial goals.
- Risk should be measured as the probability that you won’t achieve your financial goals.
- Investing should have the exclusive objective of minimizing that risk to the greatest extent practicable.
Once a long-term plan has been put in place, we very rarely recommend changing the asset mix beyond a regular re-balancing. Our principle is: if your goals haven’t changed, don’t change the portfolio asset mix. The more often people change their portfolios, the worse their results become. As the Nobel Prize-winning behavioral economist Daniel Kahneman said, “All of us would be better investors if we just made fewer decisions.” Art Phillips of Phillips Hager & North once said that “a portfolio is like a bar of soap … the more you handle it the smaller it becomes.”
The nature of successful investing, as we see it, is the practice of rationality under uncertainty. We’ll never have all the information we want, in terms of what’s about to happen, because we invest in and for an essentially unknowable future. Therefore we practice the principles of long-term investing that have most reliably yielded favorable long-term results over time: planning; a rational optimism based on experience; patience and discipline. These will continue to be the fundamental building blocks of our investment advice in 2017 and beyond.