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Our Investment Philosophy

1. Faith in the Future

Our first and arguably most core belief is faith in the future. We believe the future will be better. We believe human progress, ingenuity and hard work will continue to improve our lives and the lives of others. The progress will not happen quickly, nor in a straight line.

Of course, there is always a reason to believe “this time it’s different”. There will always be concerns around market turmoil, economic crises, war, famine, recessions, depressions, international conflict, ineffective governments, overreaching governments, severe weather and climate, inflation, energy crisis, low returns and more.  The list of potential problems is almost infinite. And most of these concerns are valid.  But we have always come out of these issues stronger and more resilient than we went in, and we believe this trend will continue.

The only information we have is from the past, and the future is uncertain. However, if you are fundamentally afraid of the future, you will never be a successful investor.

Let’s look at what the past has given us. This graph represents each year’s stock market return broken down into 10% increments. The blue colored years on the top are from 2000 – 2021.

While past returns don’t guarantee future results, the past returns look pretty good if we stand back and look at the forest instead of the trees.

In total between 1825 and 2021, there were 55 (27.9%) years with negative returns and 142 (72.1%) years with positive returns. That means, there was over a 72% chance each year would be positive. And the years from 2000 – 2021, look even better. There were 5 (22.7%) down years, and 17 (77.3%) up years. This is despite the tech collapse, 9/11, the “lost decade”, great recession, global pandemic, inflation, and Russian invasion.

Of course, while we are experiencing these events in real time, it is much harder to not panic. The news is busy telling us every day that the sky is falling, all our friends are panicking, and the stock market seems to be collapsing. Which is why our second principle is Patience.

2. Patience

In this age of instant gratification, investors often feel under constant pressure to always be doing something. However, it is often best to be patient and do nothing. Making significant changes in your investment plan based on what the charts look like today is not a sound long term approach.

If we look at the past, only 4 out of the past 20 years had negative overall returns. However, within those same 20 years, 10 years had intra-year dips that were over 10%, and 5 years had dips over 25%.

One very clear and recent example is 2020, during the COVID-19 recession. From the top of the market to the bottom, we saw a 33.66% decline in just a few months. However, if we zoom out just a little, we saw a total positive return of over 18% that same year.

It's impossible to know which market dips will quickly turn around, and which will drag on for years. Anyone who claims they know for certain is either lying to you or lying to themselves.  But, if we don’t have the patience to wait out the slumps to get to the pumps, we can expect below average returns.

It’s not enough to just be patient and do nothing. We must have a plan and be disciplined about sticking to it, in both good and bad markets

3. Discipline

Discipline, when it comes to investing, means doing the right thing in both good markets and bad. The disciplined investor sticks with their plan regardless of the latest apocalypse du jour.

History shows people are bad at making investment decisions. In the 20 years between 1998 and 2018, the US stock markets have returned an average of 7.2% each year and bonds have returned an average of 4.6% (See Image below). However, the average investor has only returned 3.4%, not including an average loss of an additional 2.1% to inflation. How is this possible!?

It’s possible because people are bad at timing the market. There are 2 common investment mistakes we see time and time again. Fear and Greed. They both come from investing emotionally, not having a plan or failing to stick to their plan. Fear strikes when you see your portfolio lose more than you can handle. Then you sell all or some of your investments because you’re fearful. Greed is watching the market spring back, “stabilize”, reach all-time highs, and then you get greedy and buy in to get some of those gains. And the cycle repeats itself. We can avoid these mistakes by having discipline and sticking to our investment plan.

We create our investment plan using 3 interwoven strategies: asset allocation, diversification & rebalancing.

4. Asset Allocation, Diversification, & Rebalance

Our investment philosophy is put into action with 3 strategies: asset allocation, diversification & rebalancing. At its simplest, asset allocation is having many different baskets, diversification is having lots of eggs in each basket and rebalancing is ensuring we don’t have too many eggs in each basket.

Client Centered

Asset allocation is the first strategy we list, as choosing your asset allocation is the most impactful single decision we are likely to make.  When choosing your asset allocation, we are trying to select the mix of stocks, bonds, real estate, cash, and other investments that are likely to give the best return, with regard to how much risk you are willing to take.

The chart above shows the annual returns and volatility of each asset class for the past 10 years, and how they compare to the other asset classes. As you can see, it is very rare for one asset class to be the best for 2 years in a row. When we create an asset allocation, we will spread our equity holdings among growth, value, small-cap, large-cap, and international stocks. We may balance our fixed-income positions among differing types of bonds. We will also likely add specialty asset classes such as real estate and commodities. With an asset allocated, diversified portfolio that is rebalanced annually (Yellow), we’ll never be the top performer, but we’ll also never be the bottom performer.

Our second principle is diversification. Within each asset class, we will invest in hundreds or thousands of different companies. If we were to only invest in a few companies, there is a possibility we would get lucky and pick the next big thing. However, it is equally likely we would be wrong and invest in companies that stagnate or even fail entirely. When we invest in a diversified, asset allocated portfolio, one company succeeding won’t make us a killing. However, one company going bankrupt also won’t get us killed.

Our third strategy is rebalancing. This means returning your portfolio back to its desired asset allocation. Let’s say we had a very simplified asset allocation of 50% stocks and 50% bonds. Inevitably, over time one would do better than the other. If after a year we had 55% in stocks and 45% in bonds, we would rebalance. This means we would sell 5% of the stocks to buy 5% more bonds, returning us to our 50/50 allocation. This doesn’t necessarily mean the bonds lost money, just that the stocks grew much faster.  

This helps in a couple of ways. Most importantly it helps regulate the risk we are taking.  If we never rebalanced, we might end up with too much in one asset class and thus too much risk tied up in one place. The other benefit is automating selling high and buying low.  It feels counter intuitive at first selling our “winners” and buying more of the “losers”. But different investments will go up, down and sideways at different times for different reasons. The winners this year may be the losers the next, and vice versa. But we know when we rebalance, we are selling what is high to buy more of what is low.

If learning more about asset allocation, diversification and rebalancing sounds like a lot of work and no fun, give us a call.  We help clients implement simple, effective, and understandable investments every day.