Quarterly Letter: Guiding Rules

Lee McGowan |

We are pleased to announce that we have hired two new wealth management professionals each with more than a decade of financial services experience. Please welcome David Guilmette and Miles Burgess to the team. In addition, we congratulate Kim Kuhn whose diligence, work ethic and loyalty to our clients have earned her a promotion to Client Service Manager. 

Market Volatility 

Thus far in 2022, we have seen tremendous market volatility. By some measures, 2022 has been the most volatile year in recent memory. According to a blog post by LPL on September 1, 2022, “…the S&P 500’s frequency of intraday volatility, as measured by swings over 1%, has been extremely elevated, with 87.3% of all days so far this year seeing such wide trading ranges. This is the highest incidence of such large intraday ranges since the major market dislocations that occurred in 2008 and 2002.” LPL points out that even during the height of Covid in 2020, there were only 62% of trading days that saw a 1% intraday swing.

While it is necessary to accept market volatility as a part of the price we pay for expected rewards in our investment portfolios, when the reality of the downside strikes, comfort levels are tested. It is worth remembering that capital markets have been encountering and absorbing startling news and resulting volatility for decades. Accepting this chronic state of uncertainty that is and always will be part of investing is challenging for many of the most seasoned investors.  

Instead of expending valuable energy on perennial uncertainties, we would suggest that the more practical approach to managing portfolios – both equity and bond portions alike – is to optimize the components that are more readily within our control rather than focus on the near-term noise that is out of our control. Fortunately, there are a number of evidence-based strategies we employ to guide the way.

Guiding Rule #1: Invest According to a Sensible, Customized Plan

If there is one principle that drives all the rest, it is the importance of having your own detailed financial and investment plan – preferably taking all aspects of your financial life into consideration. If you have a personalized plan, you have a touchstone for any and all investment decisions you make. This includes building and maintaining an appropriate balance between stocks and bonds, as well as determining how much cash to hold in reserves for near term needs and/or emergency funds. 

In the absence of a plan, undisciplined investors instead struggle to predict how, when and if it is time to react to unknowable events over which they have little control. While there is no guarantee that a plan will deliver the outcomes for which it has been designed, we believe that a plan represents our clients’ best interests and offers the best odds for achieving personal goals and providing peace of mind. 

Guiding Rule #2: Let the Evidence Be Your Guide

With a personalized plan in place, a good next step is to embrace the decades of empirical evidence that helps us understand the overarching roles for which each investment is best suited.

 Stocks – Stocks are the most effective tool for those seeking to accumulate wealth and or outpace inflation over time. But along with higher expected returns, they also expose us to a much bumpier ride (volatility), and increased uncertainty that we may not ultimately achieve our goals (market risk). 

Bonds – Bonds (particularly short-term, high-quality bonds) are an appropriate tool for dampening that bumpier ride and serving as a safety net for when market risks are realized. They can also contribute modestly to a portfolio’s overall expected returns, but we do not consider this to be their primary role. 

Cash – In the face of inflation, cash and cash equivalents are not expected to maintain buying power over time, but they are necessary to have on hand for near-term spending needs. 

By keeping attention focused on these larger principles of stock/bond investing, it becomes easier to tune out the noise of the daily headlines and market volatility

Guiding Rule #3: Act on What You Can Control

So, where does all this leave you, the long-term investor who is diligently adhering to your carefully crafted strategy? 

In short, it remains solid advice to invest according to what decades of empirical evidence has to say about earning long-term returns and mitigating related risks. That means not placing too much stock in what the headlines are screaming at all of us. It means focusing on your personal goals, and on ensuring that your portfolio is optimized toward achieving those goals – today, tomorrow and over the long haul. For stocks and bonds alike, these are the most reliable principles available to help us navigate uncertain markets as certainly as we are able.

As always, please let us know how we can help.