As the old adage goes, too many people focus on trying to win the battle. What is far more important is winning the war.
The above is a lesson that comes out of many military books and well-worn paths of wisdom. It applies equally to the work of investments. We want to talk about it here as it relates to annual investment returns. The outcome is as important as any military engagement and, in this case, the side who wins or loses is YOU. That reality should appropriately focus your attention.
First, in any use of military force you need to determine your mission, and behind that your fundamental objectives. In financial realms, that mission is making your financial plan happen with a high probability of success. Just as in military environments where ‘Hope is not a strategy’, so is it in investments. You must have a goal-oriented time-specific financial plan in mind if your investments are to mean anything. Without them, you can’t really tell if your investments are worthwhile since you can’t tell if you are winning or losing the war. They are your metric and, in my humble opinion, the only metric that really matters.
Second, if the objectives are in place (getting the kids through college, paying for weddings, retiring as you have laid out without worrying about your investments every single day for the next 9,490 days of your retirement), then measure yourself against that key objective. To be clear here, and to not conveniently cut any corners for myself, measure your investment advisor against that objective (i.e. me). There is no tally more significant (emotionally, psychologically or financially) than achieving the financial end to which you have set your expectations. I certainly don’t try to pander to you on education or necessary meaty dialogues, and hold myself to a similar high standard that I would want if I were you.
Third, that being said, we are not fighting to win each and every battle, but the war. We want the end of your days to come with fulfillment to family, living standards and legacy desires you have lain out. The battle we will not fight, because of its terribly low odds, is finding which investment is going to do well in which year (or God forbid, month or quarter). Not only is that whack-a-mole problem endemic in this industry, it is fraught with failure. Perhaps worse, it is destined for failure (Did you know that the average investor in stock mutual funds over the past 30 years got a return of 3.8% per year while the S&P 500 averaged a 11.1% gain[i]??). The investments in your portfolio did exactly what they were supposed to last year, but those portfolio results were ho-hum at best. Sure, they were overall positive, but far less than the 10-15% returns of 2013. Why? The answer is because they were diversified, which is one of three primary best-practices attributes all portfolios are supposed to exhibit. The article by Nick Murray (attached) cohesively hits on exactly that point and is well worth the read.
Converse to the above self-defeating practice and the people who ‘chase returns’, the discipline(s) we exert on your behalf were to buy international stocks while they are down, and sell USA equities while they were up. Very nicely, but certainly not magically, so far in 2015 international stocks are up double what the USA fund was up (5.65% vs. 2.63%[ii]). That singular statistic is the value of diversification.
Therefore, in summary, we purposely chose not to fight the which-year-is-which-investment-best battle. The reason is simple; I will lose the war. You hire us to win the war. If our written fiduciary promise is to act in your best interest (last month’s letter to you), then we cannot do less, or differently.
Here’s to the victors, and you.
[i] “How To Survive A Bear Market” (E.S. Browning, Wall Street Journal, March 9, 2015)
[ii] Fund Center (Dimensional Fund Advisors, February 27, 2015 Year-to-date)