Toss the Crystal Ball, Tune Out the Noise

Toss the Crystal Ball, Tune Out the Noise

Trade wars, increasing inflation, rising interest rates, high valuations, geopolitical tensions, political dysfunction, major deficits and debt, late-stage economic cycle, wealth inequality, and aging demographics are all reasons investors should be careful about investing right now. Or are they?

All these things matter, they just don’t matter that much to your long-term investment strategy. I often get the question – is now an appropriate time to invest? My answer is “I don’t know.”

However, what I do know is that if I understand your goals and cash-flow needs, I don’t need a working crystal ball.

The reality is that if you have a broadly diversified global portfolio with stocks, bonds, diversifiers, and cash that is aligned with your goals and risk capacity, in most cases it will get the job done (assuming you have sufficient assets for your goals, which is a different topic) . In my experience, the main risk to this approach is not sticking with or overcomplicating it. Further, when it doesn’t seem like its working or there is fear it won’t work, there is no shortage of seductive shiny objects to entice both advisors and investors. Marketers are great at coming up with products that appeal to your emotions. Avoid these at all costs.

Don’t fall for “complexity” story

Most advisors get the asset allocation equation correct but fail in the implementation. They overcomplicate by every means possible. The “complexity” story always sounds good, and it is designed to sell and keep the client dependent on the advisor. Further, advisors are constantly pursued by investment product wholesalers that push complexity. I get pinged by these folks maybe 10 times a day. I can count on one hand the times an index fund wholesaler asked me to lunch. There’s not much money in simple, boring, and effective.

I can put together a highly effective portfolio for any level of wealth with as little as twelve underlying index funds or ETFs. If necessary, I could do it with three funds. This portfolio would have underlying fees less than .20% and would have a very high probability of meeting client needs as well as or better than the vast majority of other, more expensive and complicated, approaches.

To be fair, adding complexity can have benefits but be very discerning. For example, using a tax-advantaged separate account that owns the individual stocks of the S&P 500 Index and actively harvests losses is usually more effective than a similar ETF. Locating tax-efficient assets in taxable accounts and tax-inefficient assets in retirement accounts is another.

Likewise, direct real estate and private equity can be worth the complexity provided you have significant assets and access to top tier managers.

Never underestimate the power of rebalancing, as it forces you to buy low and sell high without the need to understand why or have any predictive skills. Of course, you must have a target to rebalance to. Many investors don’t have one.

Volatility? So what?

But what if the stock market falls 20-40%, or more? My answer is “so what?” It would be normal and expected. If I’ve allocated the portfolio appropriately based on the client’s goals and risk capacity, they will be fine. Further, if they try to avoid volatility by market timing or not investing until things look better, I can almost assure them that they won’t reach their goals or will have to reduce spending materially. Experiencing volatility is the price investors pay to compensate for purchasing power risk, the biggest risk they face. It can’t be avoided.

What if you just sold your business or have a major cash infusion? Should you invest all at once? Studies show it is best to invest the lump sum at once. However, this is where advisors must seriously factor in the psychological aspects of investing. All things considered, I think the best approach is to implement a plan that puts new money to work within 12-24 months. This significantly reduces the risk of the client having to tolerate a major initial loss after a liquidity event. The flip side is you can miss upside, but the psychological aspects of losses are much higher than lost gains.

Human nature being what it is, this simple approach is the hardest one to stick to over the long term. However, if you understand the power of simple investing and can be humble enough to realize nobody is good at the crystal ball thing, you can give yourself the gift of tuning out the noise.

Ben Johnson
  • Kim Hillyard
    Posted at 18:43h, 01 May

    Excellent information and advice, Ben! I always appreciate your ability to simplify information and events that can otherwise be complex. Your straight-forward, open approach is refreshing, and in my opinion, no doubt one of the many reasons your clients are big fans.

  • Ben Johnson
    Posted at 21:23h, 01 May

    Thanks so much for your kind words Kim!!!