As the first quarter nears an end the inevitable question arises, “How long can the strong Q1 returns go on?” Amid the uncertainty we see many investors holding cash with little interest in taking on risk. This cautious approach means safety in the short term, but perhaps at a big loss of opportunity for the long term. Here are four ways to maintain a long-term focus following the first quarter’s sharp and unexpected advance.
Ignore the “I don’t want to feel foolish” feeling
Unhelpful thoughts get in the way of long term investing. At the end of 2018 it was easy to feel foolish. Investments had been going down for 11 straight weeks. It was painful to watch the losses pile up. Fast forward to this week and the first day of Spring and most markets are up, some substantially. The S&P 500, for example, is up 20% from its December 24th low. That’s why a plan is often a great antidote to short-termism. Your plan could include phased entry and small regular investments across many markets. You might feel foolish temporarily should your portfolio go down, but with a long-term focus you will feel on track.
Remember that there are many markets
Market cycles follow a pattern of boom and bust driven by investor psychology and exacerbated by the use leverage. For instance, the energy market has gone through a boom, a bust, and a moderate recovery over the past 4 years. We saw a high of $100 per barrel in 2014 to a low of $29 the following year. Now we are in the middle at $58 per barrel. When people ask about “being at a market high”, remember that there are many markets that experience their own market cycles. A diversified portfolio reduces risk by holding stakes in multiple markets at different stages of growth.
Some other markets that have gone from boom towards bust recently:
- High end luxury real estate. Markdowns of 20-50% are now common. For most people the luxury real estate market – $10m and above – is not relevant to everyday life. But it could become relevant if the luxury real estate rout extends downward, all to the way to the $1m level.
- Cryptocurrencies: down -80% to -99%.
- Volatile economies. The Venezuelan economy has essentially collapsed altogether
By contrast, Brazil is back into boom territory having compounded at +25% per year for the last three years after reaching what looks like the end of its long painful bust in 2016.
Domestic stocks and bonds have recovered nicely from yearend and are advancing steadily. Although we can’t know for sure where the US stands in the cycle, most agree that we won’t have a recession within the next two years and that the growth cycle can continue for some time.
Resist the urge to only buy things that have done well
Everybody loves a winner. People tend to buy investments that have done well. It’s fine to buy market leaders as long as they are part of a diversified portfolio. REITS are in the top three best performers this year. It is okay to keep buying REITS as long as you also add to Japan, gold or other out of favor asset classes, too. REIT performance will eventually fade and the other investments will take over the lead. That’s what happened with small US stocks in early 2016 after three years of going nowhere.
Make a plan and stick to it
Think about the last 10 years and your investment portfolio. I am sure you were tempted to stop investing as markets went up and up, uncertain that the gains would continue. The better way to invest is to stick to your plan. An investment plan based on multiple investments and regular purchases typically does very well over the long term. If you are starting now from 100% cash because you just sold your primary asset, then begin with phased investing. You can phase in for 12-36 months because that period will cover almost all investment cycles.
It’s hard to ignore the short term. Investing is best viewed as a long-term enterprise, with performance measured over years and decades, not weeks and months. If you need some help getting past short-term biases, we’re happy to help.
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