Below is our Chief Investment Officer's (Tom Bradley) letter to clients from our Quarterly Report.
It’s a weird thing about investing. On one quarterly statement, returns look disappointing and you’re wondering what’s going on, and on the very next, everything is terrific (and vice versa).
A year ago, we were reporting that the Founders Fund, a good proxy for balanced portfolios at Steadyhand, was down 12.9% in the first quarter and had a negative 1-year return of 8.9%. By year-end, however, the Founders’ annual return, which included 11 great months and one horrible one, was back above its long-term average.
And here we are now, three months later, still struggling to exit a devastating pandemic, and the 1-year return is, well, terrific. The horrible month is gone, replaced by a good one.
These inexplicable shifts are related to a phenomenon known as end-date sensitivity. Short-term returns can swing dramatically from quarter to quarter simply by dropping off a poor (or good) three months and replacing them with good (or poor) ones. If the difference between the dropped quarter and the added one is large enough, like it has been in recent quarters, the swing can even cause the 3 and 5-year numbers to move around meaningfully.
Is there a problem with end-date sensitivity? Not really, as long as you’re aware of the effect and don’t change your strategy (or lifestyle) based on the results at one quarter-end. It’s okay to open a good bottle of wine and enjoy the recovery, but then cast your eyes on the 10-year and Since Inception numbers on the performance tables. These boxes are intentionally shaded because they’re the most useful measure of how you’re doing.
How you react to unusual periods, good and bad, is really important. Your strategy and fund managers didn’t go from being inept to brilliant in three months. Expected returns haven’t increased from 6% to 12%. And disappointingly, you’re not suddenly able to retire at 50 instead of 65. In other words, your long-term assumptions and plan are still relevant.
It’s particularly important right now to not overreact because the fear of missing out is alive and well, whether it’s Nasdaq stocks, exciting new IPOs, bitcoin, cannabis, or even GameStop. Unfortunately, investors who give in to FOMO only experience short-term success, if any success at all. That’s because they don’t know why a stock or fund is going up (“It’s just going up”) and as a result, don’t know what to do when it’s not.
At Steadyhand, we’re pretty good at keeping FOMO under control and focusing on holding businesses that will build our clients’ wealth over time. This has served us well over our history, even if it has tempered our shorter-term returns at times (i.e. the last few years). Today, we’re more focused than ever on this because we’re excited about the opportunities out there for rational, valuation-driven investors and at the same time, believe the risks are extreme for speculators who are trading rapidly and using leverage.
I heard someone say the other day that in this market you need to know what game you’re playing. For you, it’s not a game. It’s about the last third of your life. In that respect, our focus continues to be on generating long-term, sustainable returns you can retire on. We just can’t be sure how weird and wacky it will be along the way.
And speaking of sustainable, I can’t resist finishing with the news that we recently passed $1 billion in assets under management. While it’s just a number, it’s a milestone our team has worked hard for and is proud of. And most importantly, we want to thank you, our clients, for helping us get here.
We encourage you to read the rest of our Q1 Report, where we provide more details on our specific strategies and what we've been doing in each of our funds.
[Management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. The indicated rates of return are the historical annual total returns including changes in unit value and reinvestment of all distributions and do not take into account sales, redemption, distribution or optional charges or income taxes payable by any securityholder that would have reduced returns.]
We're not a bank.
Which means we don't have to communicate like one (phew!). Sign up for our blog to get the straight goods on investing.