by Scott Ronalds
It was another positive quarter for investors, with both stocks and bonds climbing higher. The global economy bounced back nicely, but the recovery is sure to be bumpy going forward as the second wave of COVID-19 looms large and a crucial U.S. election is just around the corner. Below is Tom Bradley's (our Chief Investment Officer) quarterly letter, where he provides some insights on how clients should view these issues from an investment perspective.
“Straying from your SAM [strategic asset mix] based on what’s happening on the political and economic scene is a mug’s game. You’ll get it right sometimes and feel brilliant, but there’ll assuredly be other times when you get your head handed to you.”
I’ve clipped this comment from a recent post because I know many of you are wondering how to prepare for the U.S. election and the second wave of COVID-19. The media is telling you to batten down the hatches and you’re less convinced that reacting to current events is a ‘mugs game’. My mission here is to explain why we’re being so stubborn on this point.
The first and most important reason is that the media and experts are often wrong. Nobody knows with any precision or consistency what will happen in the short term. There are many economic factors that come into play — inflation, interest rates, currencies, profit margins, availability of credit, technological innovation (and obsolescence), capital spending, demographics and pandemics — and they interact in unpredictable ways (for every action there’s a reaction). Often the issue getting the most attention will have little or no impact on stock prices (I think the U.S. election fits in this category).
But let’s assume you pick the right expert and have the future figured out. You then need to determine how the market will interpret the news. This too depends on a myriad of factors including how many people have the same view. Is it already baked into the cake?
You get the picture. Timing the market is impossible, which brings me back to SAM. As a reminder, your strategic asset mix is the long-term blend of cash, GICs, bonds, stocks and real estate that best fit your objectives, risk tolerance, income needs and personality. It’s the most important tool you have for finding the right balance between risk and return. And when preparing for an uncertain event, like the election, it’s the best place to hide.
As unsatisfying as this sounds, there is ample proof to suggest that sticking to your plan works. The long-term charts for balanced portfolios trend up and to the right, even with the inevitable dips along the way. In recent years, those dips have been spurred by turmoil in Washington, a European banking crisis, trade tensions involving China and Britain, COVID-19 and sometimes the market just needs to take a breather. The key point here is that the onset of each pullback, and the shape of the recovery, was unpredictable, while the long-term trend has been remarkably reliable. Investors who stayed on course have a record that few market timers can match.
So, what should you do about the election? We encourage you to check in on your portfolio (using the Q3 statement) and make sure it’s still in line with your SAM. Markets have been uneven in 2020 (as evidenced by our fund lineup) and some adjustments may be necessary. If you’re at or near your SAM, you’re good.
If you’re primarily invested in the Founders Fund, the adjustments have been made for you. For example, after the March meltdown, the fund moved back to its SAM by shifting money from the Savings Fund into the four equity funds. Since then, it’s been fully invested in stocks (62-66% of the fund). More recently, the market recovery has necessitated some rebalancing to keep the equities in the low 60’s.
We are living in challenging times but don’t let the hot air from south of the border blow you off course. Your time frame is much longer than any politician’s promise or commentator’s forecast.
We encourage you to read the rest of our Q3 Report, where we provide more details on our specific strategies and what we've been doing in each of our funds.
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