Yesterday…all my troubles seemed so far away. Now it looks as though they’re here to stay.
“Yesterday,” Beatles (1965)
Well, here we are in yet another crazy, mixed-up world with a list of troubles seemingly without
end and seemingly here to stay. At home, we have a work force reluctant to go back to work,
persistently high inflation, an ultra-high federal debt load, and a governing class looking like
two armed camps. Overseas, we’re dealing with two large-scale wars, either one of which could
become a much larger conflict. What’s the investor supposed to do in the fall of 2023? Always a
good question, and we once again were reminded of another time and place and another set of
highly unpredictable outcomes.
September 2020. A good friend and client asked one of us about the upcoming presidential election,
specifically how that election might impact her portfolio and what, if anything, she and we
should do about it. The lengthy email response? Not much that clients and other friends of the
Firm haven’t heard before from us, but a few things you might find interesting. Naturally, we’ve
done some editing of the original email, and, in the immortal words of Jack Webb, “the names
have been changed to protect the innocent.” Anyway, here goes. The subject is the 2020 election,
but to make a few points, as you’ll see, we go back to 2016.
Morning Susan,
Thanks for the kind words in yesterday’s email. No question, the November 3 election
will rank right up there with all the other notable events we’ve witnessed so far
in 2020.
You asked about November 3 and the markets. I’ll begin by telling you a story. Early
in 2016, I took a swing through some neighboring states. Drank some beer, ate some
good food, and met with a few clients. At lunch one day, a client and I had a lengthy
political/economic discussion regarding Donald Trump. He was still just one of several
possibilities but clearly the most unconventional of those possibilities. The client
asked what it might mean if Donald Trump ever were nominated and then elected. I
told that particular client what we routinely tell all of our clients: These things basically
are unforecastable (as is their impact on the capital markets), never make big
investment decisions based upon conjecture/speculation, etc, etc.. As we got into the
summer months and Donald Trump clearly was going to be the nominee, the client
and I had a second conversation, this time on the phone, and I reiterated the points
made in the earlier discussion. Then, in the wee small hours of November 9, when the
totally unexpected outcome was known, the Dow Jones futures were off 800 points.
Actual trading, of course, began at 9:30, and the DJIA surprised everyone by turning
around completely…finishing up 256 points for the day. The bull market that had
begun in 2009 then resumed until the COVID mess hit the fan in late-February of this
year, three+ years after the 2016 election.
What’s the point? As stated, we believe that these markets (and elections) basically
are unforecastable – we can’t do it, and no one else can either. The right thing to do –
and we preach this constantly – is to set up your asset allocation structure in a way
that’s appropriate for your circumstances and in a way that makes you comfortable.
Then, adjust that asset allocation only as your circumstances change. In other words,
stick to the plan. Sure, a Biden presidency would be different from the continuation
of a Trump presidency. Relatively speaking, of course, different winners and losers.
Others and we have some thoughts, but should they fundamentally alter an overall
investment plan that’s appropriate for you and Steve? Probably not.
All that said, there are a few things that we routinely recommend and a few changes that seem appropriate around the edges.
First and foremost, staying well-diversified never has made more sense. Again, these markets basically
are unforecastable, so it’s important to invest in asset classes that respond to different forces and,
therefore, do not all move together in price.
Second, to a large extent, index your overall portfolio. The reasons: Indexing outperforms most active
management over the long haul, indexing is cheap, indexing is style-pure, i.e., the investor knows
exactly what he/she is buying.
Third, re your non-indexed individual equites, emphasize the Value style. U.S. equities in general
aren’t particularly inexpensive in terms of underlying corporate earnings and dividends, but Cyclical/
Value equities are. The Growth style? We believe that both investment styles belong in a welldiversified
portfolio, however, Value always deserves the larger weighting.
Fourth, make sure you have a position in gold. No one should get carried away, though. The price of
gold has gone up a great deal this year, which means that all the gold bugs are about to come out of
the woodwork. Five to 10% of your assets makes sense…20-30% (these are the numbers you’ll be
hearing) does not.
Finally, keep a good slug of cash on hand. Always remember what Will Rogers said, though… that
he’s mainly interested in the return OF his money instead of the return ON his money. That certainly
applies to anyone’s Rainy Day Fund.
So, in answer to your question, sadly, I don’t know what will happen to the stock market if Joe Biden
defeats Donald Trump or Donald Trump holds off the Biden challenge; but, the economy is very resilient
and, as the two of us have discussed many times, should continue to recover from the trauma
of COVID. For the most part, sticking with your basic plan is the thing to do, but you can hedge
things a little around the edges, e.g., greater diversification, gold, cash.
That’s about it, Susan. Hope this helps. Take care, and best of luck to us all.
With the 2023 finish line two months away, there’s no shortage of issues keeping investors up at night. And, the attendant drama includes endless chatter (of highly dubious value) regarding investment strategy in case this or that happens in Washington, this or that happens on the international stage, etc. But, as we told our good friend in 2020, such accurate, strategy-altering predictions are hard to come by. Instead – and we hope the above, rather verbose email makes the case – better to let one’s circumstances and comfort level dictate the plan. And, once the plan has been made, there are some things to keep in mind…things that will help the investor stay the course in good times and bad:
1) Diversification always makes sense.
The above email led off with this bit of sage advice. We’re talking many asset classes that do not all move together in price.
2) U.S. equities have delivered 9-10% per year for the last 100 years of wars, depressions, inflation, and the best and worst of humankind.
The data are irrefutable.
3) But, the data come with a big caveat: If the investor signs up for the U.S. stock market and the prospect of those 9-10% returns, he/she also is signing up for periodic sell-offs, some of which are severe and can be nerve-racking.
Sad to say, downside risk never can be hedged away completely, and the investor is accepting some level of risk even with ultra-low exposure to stocks. In other words, losses in calendar quarters, even losing years, are unavoidable. Whether we’re talking about Paul McCartney’s troubles or our own as investors, those troubles frequently are lurking just over the horizon (not far away), but rarely are here to stay. People and economic systems, ours in particular, are resilient and can handle the unforeseeable, and the seemingly insurmountable almost always fade away as time passes.
So, the key to long-term investment success: Stay well-diversified, and keep your eyes on the prize, even as you know full well that there will be bumps in the road. Never let the Sirens alter your course. That’s what to do in November 2023, November 2024, November 2025,…