2020 was the year of temptation from an investment perspective. Most investors face maybe one or two events in a year that test their convictions and discipline on whether to hold the course or not. By my count, 2020 threw four whoppers at us.
Temptation #1 – The S&P 500 declined by -34% from Feb 19th to March 23rd. Only to increase by 30% from March 23rd to April 30th.
Trying to time the market would have been extremely costly.
Temptation #2 – The global pandemic, the hardship, suffering by many and the prospect of it continuing for 3-4 years until a vaccine was developed.
2021, vaccines have been developed, approved and are in distribution.
Temptation #3 – Giving in to Fear itself (F-uture, E-vents, A-ppearing, R-eal) of a complete global economic shutdown and the resulting financial impact.
Some sectors suffered immensely, some held their own, and others had monumental success.
Temptation #4 – Tilting away from value companies – 2020 witnessed one of the biggest divergences between value and growth companies since the late 1990’s. There was a tremendous amount of temptation to buy these hot stocks/sectors (i.e. FAANG).
Value stocks have rewarded investors in the 4th quarter of 2020 and year-to-date 2021.
In hindsight, 2020 has reminded us that temptations are always present when investing and that is the price we pay to achieve higher expected returns than bonds.
A combination of experience and academic research has taught us to embrace diversification and not to get carried away with “hot” sectors/markets and high valuations as they never persist indefinitely. A good example was the “dot-com” bubble in early 2000 as we saw tremendous demand and price appreciation in internet companies, only to see the hype come to a screeching halt shortly thereafter due to valuations being out of line with prices.
You see, we have a clear investment philosophy. We believe in broad exposure to global markets and tilting portfolios to areas of the market that have higher expected returns. Most importantly, we build a client’s investment portfolio to cater to their specific risk tolerance all while educating on market volatility and return expectations. Once this plan is established, we rebalance as necessary to the target allocation of stocks, bonds, and real estate. Finally, we coach clients to stay disciplined to their plan.
In life, our philosophies and beliefs are rooted in values and principles. It is the same in business. At The Andrews Group, the following six Core Investment Principles shape our investment philosophy:
1/ Market Work – They are efficient but not perfect.
2/ Market Timing does not work.
3/ Diversification is a key component of success.
4/ “Winning” managers are difficult to identify in advance.
5/ Asset allocation explains performance and volatility.
6/ Behaviour affects returns – Being disciplined is extremely important.
Our philosophy follows a rigorous academic approach, has been tested in both positive and negative return years, in all geographic areas around the world, and is built upon research-based principles. We are very confident in our approach. That said, it will rarely, if ever, be the best performer in a particular year. Let me explain.
With the returns the technology sector experienced in 2020, it’s easy to look back and say, we should have owned more of these companies. Or, what about the marijuana craze in 2018. Or gold in 2011. Or real estate the last number of years prior to 2020. If you pay close enough attention, there is always a “hot” sector. Trouble is, it is often very difficult if not impossible to identify in advance, and arguably even more challenging to get out of it before it goes down. You must get both decisions right; when to buy and when to sell.
To this point, last year we completed an analysis to determine what the result would be if an investor in the Canadian market was able to avoid the 25 worst days over 42 years (from 1977 to 2019). We also assumed they missed the 25 best days as the best days tend to occur within two weeks of the worst days. The result, the investor would have increased their return by 0.54% annually. As you can imagine, timing those days (only 3.3% of the total days, over 25 years) is very difficult. The question is, “do you want to take the chance of timing the market within a small number of days to get an incremental increase when there is a high probability of failing to meet your goals?”
If you try to pick the best sector, country, stock, or market, based on what you think is hot or will be hot in the future, you will most likely end up missing positive returns altogether or making a poor timing decision. Very few people can get this right, never mind do it consistently. That said, hindsight is always 20/20. It is easy to pick a fund that has done particularly well in a time period by being concentrated in a hot area of the market. The challenge is, doing it in advance is extremely difficult, and possibly even dangerous. Making a concentrated play can not only harm your portfolio in the short term but doing so regularly, can have big implications. I often tell clients – we invest, we do not gamble. These are two very different things.
The most difficult part about investing for most people is discipline. Even when you have a well-thought-out investment philosophy, it’s not always easy to stick to it. There will be times when it performs exceptionally well, and others, when it performs poorly relative to other options. In both of these times, it is extremely important to stay the course. The key is to not get too excited when things are going well, and not get too low when things are not. Easier said than done. Not only will maintaining discipline benefit the rate of return over the long run, but it also allows a degree of certainty from a planning perspective, allowing one to make more prudent life decisions.
We believe having an investment philosophy is central to our clients’ achieving financial success.
What do you think? We would love to hear your thoughts.
By Chad Butnari
Assante Capital Management Ltd. Is a member of the Canadian Investor Protection Fund and is registered with the investment industry Regulatory Organization of Canada.
This material is provided for general information and is subject to change without notice. Every effort has been made to compile this material from reliable sources however no warranty can be made as to its accuracy or completeness. Before acting on any of the above, please make sure to see a professional advisor for individual financial advice based on your personal circumstances.