Featured entries from our Journal

Details Are Part of Our Difference

Podcast Episode – Meir Statman

With the Recent Events in Ukraine, Should I Make Changes to My Portfolio?

Embracing the Evidence at Anheuser-Busch – Mid 1980s

529 Best Practices

Author: Matt Zenz

With the Recent Events in Ukraine, Should I Make Changes to My Portfolio?

There is no downplaying the news coming from Ukraine and Russia. While Russia makes up a small percentage of the overall global stock market (less than .25% as of February 23), Russia and Ukraine both play considerable roles in producing and supplying commodities such as liquid natural gas, wheat, etc.

What does this mean for you as an investor?

The situation is currently evolving. We know that political leaders from the West condemned Russia’s actions and vowed significant sanctions in response. Markets reacted with increased volatility, and some stocks retreated.

While no two historical events are the same, historical context is often helpful to put current events into context. The chart below illustrates the growth of a dollar invested in global equities alongside past crises. Think back to some of these events- it’s easy to remember how uncertain the future felt. Putting current events into this context helps us take the long view. The chart shows that markets rewarded disciplined investors for their grit. This chart is a good reminder of what it means when you invest for the long term, and the fortitude being demanded of us today.

Takeaways

  • It is rarely advisable to mix emotions and investing.
    History shows us that a critical ingredient of long-term investing success is having discipline in good times and in difficult periods. Markets have rewarded investors willing to tune out the noise and stick to their plan. So, we advise you to stick with yours.
  • Your systematic investing approach already adjusts to new information in real-time.
    Investors in global equity portfolios inevitably face periods of geopolitical tensions. Sometimes these events lead to restrictions, sanctions, and other types of market disruptions. We cannot predict when these events will occur or exactly what form they will take. However, we can plan for them. We do this for you by managing your diversified portfolios and building flexibility into our investing process.
  • Staying invested is the winner’s game.
    In good times and in bad. A recent report by Morningstar investigated how successful investors are when trying to time markets. Ultimately, the report concluded, “The failure of tactical asset allocation funds suggests investors should not only stay away from funds that follow tactical strategies, but they should also avoid making short-term shifts between asset classes in their own portfolios.”  Why? Missing out on a couple of the best-performing days wipes out your returns. And, to time correctly, you must be right twice – both when to get out and when to get back in.*
  • Diversification is the only free lunch.
    This quote attributed to Harry Markowitz as essential now as ever. We believe that the most effective way to mitigate the risk of unexpected events is through broad, global diversification and a flexible investment process. This philosophy allows you to ride the wave through any crisis, such as natural disasters, social unrest, and pandemics, limiting risky overexposure to any particular sector or market.
  • Take the long view.
    We don’t believe that this time it’s different, but instead the apocalypse du jour. You can be confident in your approach, your plan, and your team. We are here for you.

 

* Amy C. Arnott, “Tactical Asset Allocation: Don’t Try This at Home,” Morningstar, September 20, 2021.

 

Hill Investment Group may discuss and display, charts, graphs, formulas that are not intended to be used by themselves to determine which securities to buy or sell, or when to buy or sell them. Such charts and graphs offer limited information and should not be used on their own to make investment decisions. Hill Investment Group is a registered investment adviser. This information is educational and does not intend to make an offer for the sale of any specific securities, investments, or strategies. Investments involve risk and, past performance is not indicative of future performance. Consult with a qualified financial adviser before implementing any investment strategy.

What HIG Predicts in 2022

At the beginning of each year, money managers and financial experts release many predictions around what the forthcoming 12-months will bring from an investing standpoint. But forecasts rarely pan out, particularly in a year as unpredictable as 2021. It is hard, if not impossible, to outguess the market.

So what is the Hill Investment Group take? We expect the US stock market to be up in 2022 between 6-10%. We also predict that the market will most likely not return between 6-10% in 2022.

You probably needed to read that prediction twice, as it seems to contradict itself. Let us explain.

Why do we expect the market to be up between 6-10% in 2022?

That probably seems too simple of a claim given the current market environment. As of the writing of this post, the total US market is at an all-time high; Omicron is spreading rapidly throughout the US, inflation expectations are higher than they have been in decades. Historically, the market has been up, on average, between 6-10% annually. Clearly, with all of these unique circumstances, we can’t expect this year to be like previous years, right?

That is the beauty of the market. Every year is different, and every year the market takes all of these factors into consideration when setting prices. Investors know all of the risks mentioned above, and the current price reflects a fair price for taking on those risks. No matter how you slice the historical data, the market is up about two-thirds of the time, usually between 6-10%. Whether you look at what political party is in office, what inflation expectations are, whether the market had a positive return the previous year, or even if the St. Louis Cardinals made the playoffs…These factors are incorporated into the current price and usually provide investors an expected return roughly between 6-10% over the long term for taking the risk of investing in the equity markets.

Why do we predict that the market most likely will not return between 6-10%?

Although the market, on average over the last roughly 100 years, has returned between 6-10% annually, it rarely returns within that range in any single year. About 1/3rd of the time, the market has had a negative return, about 1/3rd of the time a return between 0-20%, and about 1/3rd of the time a return above 20%. Dating back to 1928, the market has only had a return within two percent of the long-run average four times! Yes…only four times in nearly a century.

This is why we EXPECT the market to return between 6-10% but PREDICT that it most likely will not.

When investing in the stock market, the range of investment returns is much larger than the average return. This is part of what makes investing so hard and why many investors, especially those that choose to do it themselves, get scared and leave the market just when they should likely stay in…or vice versa. It is difficult to see the long-run average when dealing with such volatile swings year to year. However, when you take the long view, embrace our relationship, and think in terms of decades rather than years, you will start to see the benefit and ignore the year-to-year noise and volatility.

 

Data from Fama/French US Total Market Index

Future Equity Returns

You might have seen articles making equity returns predictions for the next 5, 10, or 20 years. These predictions often forecast dire conditions, which in turn get the reader asking questions like “Is this true?”, “Should I be worried?”, “How should I use this information?” When reading these articles, it’s essential to step back and think about what we can control, what we can’t, and how we should act with that knowledge in mind.

Are these predictions accurate? No one knows. Equity markets are volatile, and the timing or magnitude of returns is tough to predict. Even experts have a terrible track record of reading the tea leaves and investing based on their predictions. Said differently, even those who get it “right” don’t get it right all the way. A common source of error is timing. A famous example is Robert Shiller, credited with “predicting” the 2008 housing market crash with the phrase “irrational exuberance.” The problem? He made that claim in June of 2005, and the market continued to rise for another three years. By the end of 2010, within two years of the crash, global markets on average were once again higher than the June 2005 levels and have remained higher ever since.1

Should you worry? Since you can’t control near-term future returns, there is little benefit to trying to predict or worrying about them. However, based on the past 100 years or so of market history, we can be generally confident in the long-term future of positive global equity returns. This is because investing in equities involves taking risks, and investors would not take that risk unless they expected some positive return in exchange. Moreover, we know from the past that the range of short-term outcomes will be broad: sometimes positive, sometimes negative. Knowing that short-term results can vary may sound like a bummer, but it can help us build confidence (read on to find out how). 

How can I use this information? Using historical returns, we can determine how much investors, on average, have been compensated for investing in equities over the long term. We can also understand something about the range of possible outcomes over shorter periods. This info is useful when constructing your financial plan. 

At HIG, we can perform an in-depth analysis that includes the financial factors you can control, like saving and spending, and the ones you cannot, like market returns and inflation. Our team uses a sophisticated statistical tool that runs thousands of simulations to determine a range of different potential outcomes for your specific situation. Comparing this range to your goals can give you a sense of your personal “odds of success.” When the analysis shows >85% probability of meeting your goals, we find most clients are comfortable that they are on the right track. The benefit? Confidence. You can focus your time on what’s truly important and ignore the crisis of the month. In other words, we have your back.

If you would like to talk more about this, our CIO office hours are open. Feel free to schedule a 30-minute call.

Featured entries from our Journal

Details Are Part of Our Difference

Podcast Episode – Meir Statman

With the Recent Events in Ukraine, Should I Make Changes to My Portfolio?

Embracing the Evidence at Anheuser-Busch – Mid 1980s

529 Best Practices

Hill Investment Group