Quarterly Commentary – April 2024

Why Be Rational?

You’ve often heard me say:

“When it comes to investment returns over the next 10 years, you’re going to love us for 2, loathe us for 2, and forget my last name for 6!”

What this actually means is that, over a 10-year period, the market typically goes up dramatically twice (the years you love us), goes down dramatically twice (the years as you loathe us) and 6 of the 10 years you get an average return where you think we are doing an “okay” job.  The good years and average years are easy to work with, but, it’s the “loathing years” when having an investment strategy is key.

I hope you never loathe us, but I use this phrase to illustrate that 2 times out of 10, you’re probably going to lose money.  It is a fact of investing in the stock and bond markets and we need to be prepared for this likely outcome. The trick is, we are pretty good at telling you how often something is going to happen, the problem is we just don’t know when!

For his Nobel prize-winning work, Prof. Daniel Kahneman researched human, social, cognitive, and emotional biases to better understand economic decisions, market price movements, investment returns, and the allocation of resources.

His findings… the more emotional the financial event, the less people are rational in their reactions.  Thus, a lack of discipline and emotional control during these events can adversely affect one’s long-term investment results.

Investor behavior is often characterized by overexcitement, both positively and negatively. The average investor has the tendency to increase their investment allocation to the holdings that perform the best in the short term. Conversely, investors tend to reduce their investment allocation to the holdings that perform poorly in the short term.  As a result, when market corrections occur the average investor is likely to be significantly over-weighted to the investments that have had the best recent short-term performance.  Often leading to a more dramatic decline during market corrections.

This often leads to investor panic – believing they will lose “too much” money, and the most common reaction is to sell quickly to “cut their losses”. This behavior drags the market down further, suggesting it is a self-fulfilling prophecy.

I share this because our goal is to build portfolios that give consistent returns for any given risk level.  This means having a well-diversified portfolio, such that when you look at all the investments in your portfolio, each of them will typically be at the bottom at one time or another. 

However, they will also typically be at the top at one time or another. Not all investments perform the same at the same time and, therefore, your overall portfolio risk can be reduced while maintaining a consistently good return.

One silver lining of the last 5 years, we have seen it all.  We have seen some investments do well, while others did not.  We have seen all investments suffer at the same time, and we have seen all investments thrive at the same time.  We have covered all the bases.

I wish I had a crystal ball to allow me to see what investments will do best, and when.  But sadly, I don’t.  Thus, I must lean on what I have learned from those before me, and what I learn on an ongoing basis – Remain well diversified. Remain as rational as possible during emotional market declines. And remain confident that what we have seen before, will happen again.

Love as much as you can.  Loathe is little as possible.  And continue growing.  Not a bad mantra for investing and life!

All the best,
Bryson

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