Client education really helps

One thing we have been doing actively over the past few weeks is reaching out to clients to get a read on their state of mind with respect to not only their health and well-being but also about concerns surrounding their investment portfolios and financial plans. It has been heartening that we have actually had very few who have expressed a high level of anxiety about their investment portfolios. They have questions and concerns of course, but we are not seeing a “panic” mentality to reduce equity exposure. This is a good thing because we feel we have educated our clients in understanding that a)  market timing does not work and b) they should not be overly concerned about their investment portfolios as long as they remain true to the investment strategy and asset allocation developed from their financial plan.

Poker champ's view on diversification

This weekend’s Barron’s magazine ran an interesting article about Annie Duke, a world champion poker player. Annie now provides consulting and coaching services to managers in the financial services industry. Her insights into risk management under uncertainty can be extremely valuable. I found it really interesting when asked what she did with her money in this most recent financial crisis, her response was “nothing, on purpose…..I kept my 65% equity, 35% fixed income allocation.” She went on to explain that, as with winning in poker, one has to understand where and when one can “outthink” other people. She understands that if you don’t believe you have special expertise or can outthink the other guy, in this case the market, you are much better off playing a “hand” you know will work. In this case, Annie is making a reasoned “bet” that her 65-35 portfolio has the highest “payoff” probability over time, rather than trying to time the market which we know has a very low payoff probability.

Benefits of diversification

Yesterday I posted on how market timing can materially reduce long-term investment returns. An excellent way to eliminate the negative impacts of emotionally-based market timing is through holding a portfolio that is diversified across several asset classes. Case in point: a recent study by Morningstar looked at the last 20 years ending March 31, 2020 and showed that a diversified (60% equity, 40% bond) portfolio achieved a total cumulative return of 176% compared with the stock market (S&P500) return of 155%. Diversification worked by resulting in lower portfolio drawdowns during market declines and allowing for faster capital recovery in market uptrends. Moreover, the study shows that in highly volatile markets like the last 20 years, diversification is important in both preserving capital and delivering higher absolute and risk-adjusted return.

Bob Toomey, CFA/CFP
VP, Research

Market timing can hurt investment returns

Volatile stock market conditions like we have experienced lately can cause anxiety and induce people to sell their stocks and wait for “a better time to invest”, in other words, “time” the market. History shows there can be a big cost in attempting to time the market. A recent Morningstar study shows that during the 20 years ending December 31, 2019, if one remained fully invested in stocks, the average annual return was 6.1%. If one missed the 10 best days of the market, the return dropped to 2.2%. If one missed the best 20 days of market, the return was actually negative, -0.13%. The point? Emotionally-driven market timing usually fails and can have a material adverse impact on the success of one’s investments and financial plan.

Bob Toomey, CFA/CFP

VP, Research