Paralyzed, by the Puzzle, or Propelled by the Path
The common things that drive investors and much of the investment industry stand in stark contrast to what drives markets and what investors need to do in order to find successful outcomes. We cover this, where we see opportunities today and our track record of being advisors of conviction in this week’s messages.
Five Things You Should Know
Insights for Investors
Intro – The Participant (Actors)
The journey of an investor can certainly rival some of the best dramas ever written with plenty of fear, greed, successes, and failures. While the markets, like life, often get blamed for this drama the “participants” certainly play their part in it as well.
When it comes to investors one of the issues that exacerbates poor decision making, which leads to more “drama”, is the strong desire to view things in a binary fashion as being good or bad. There are many times, such as now, when things are very gray and the best advice I can give is “when in doubt … don’t.”
That isn’t to say changes in one’s plan or portfolio should never occur, in fact they must which brings us to the issue with much of the investment industry. Coming to the point where you are confident in the need to make changes takes a) a lot of homework, b) no conflicts of interest so you can make those decisions with only the client in mind, and c) courage to perhaps look foolish for a time. The issue is that many brokers/advisors want an easy workload and/or easily defensible path forward and right decisions as we discussed before usually are “hard” to make.
Finally, is Mr. Market. If you wonder why investors and advisors struggle so much it’s that the traits that often defined them outlined above are the antithesis of how Mr. Market acts. Mr. Market (and the economy) is anything but easily definable as good or bad, and in fact almost always has good reasons for investors to embrace hope or fear – realizing this and letting them “balance” your emotions is the key. Furthermore, unlike those in the industry hiding behind scripts and cliches the market is anything but static. The market, as the old saying goes, is most likely to do whatever will surprise the most people.
The Path Forward
With so much potential peril, why even invest (e.g., leave the shore)?
To be frank because life demands it for most all of us.
To reach the goals we have for our families, whether those are exciting things such as family vacation, higher education or a vacation home or simply to safely provide for basic needs, we need to save and have that money earn us a return/income.
For those of you that worry a bit more than some, it is critical to remember the damaging effects of inflation over time. A mere 3% inflation rate over 10 years destroys over 25% of your purchasing power.
Doing nothing and “staying on the shore” is simply not an option for most.
The good news is that while yes there will be “waves of volatility, successfully reaching your goals on the other side is not dependent on your ability to predict the market’s “weather.”
The Problem (& the Solution)
To reiterate the problem, or challenge, for investors is to let go of the pressure to predict, to be perfect, and/or to define with exactitude a market whose nature will only frustrate such efforts to the point of countless failures.
That said, staying with an approach or advisor that never adapts may be “easy” in the short run, but result in a much “harder” reality down the road.
The good news is this isn’t mission impossible. Discipline, doing the hard thing (e.g., taking time to plan and “buying” low) and diligently monitoring for opportunities can result in investors making amazing progress over time.
The Puzzle – What to do with today’s market?
Is inflation abating or going to stay stubbornly high? Are we in a technical recession today or perhaps headed towards a severe one tomorrow? There are as many questions today as I can recall in quite some time. Questions with answers that only time will unveil.
This all results in an environment that challenges the issues raised above as much as any investing environment would.
To those investors looking to define the current outlook as good/improving or bad, an honest look at the data will only frustrate and result in more confusion. Growth is moderating but it’s still there, so too with inflation.
As the next two charts show there is reason from supply chains (chart 1) to monetary supply stabilizing to believe inflation will cool sooner than many fear, but how fast and how the Fed respond remain unknowns. Panicking at this point after a fair amount of market damage among stocks and bonds could prove foolish, but so too could be the presumption of a return to what has worked over the last few years.
To those advisors that fall within the definition above of those that have failed to adjust and evolve over the last few years, they are being exposed this year. As the following chart below shows, the basic 60/40 has failed to live up to its past performance or protect investors in a way they’d expect.
So, what is approach we’d have investors consider at this time?
Well, after two years of general skepticism or dislike of many parts of the multi-faceted fixed income universe, there are a number of opportunities that are emerging from this year’s sell off.
For those investors paralyzed by today’s market, consider that bonds may be set up quite well regardless of what path unfolds:
For those of you out there saying, “but isn’t the Fed going to continue to raise rates and wouldn’t that hurt bonds as it has?” Possibly, but you need to keep in mind that it isn’t just the Fed’s actual hikes to date but the pricing in of future hikes. After last week’s hawkish comments those expectations are quite high, and our position is most of the damage is likely already priced in.
As to our record on managing fixed income for clients? Well thankfully, there is a published public record and unlike the advisors admonished above, we’ve been anything but static.
You are welcome to go back and read our thoughts in more details in the links below but here is the short history of us “walking the talk” of this week’s message.
We mentioned courage above and that is because it often is the key to maintaining the discipline and patience required to achieve success. As you can see from the chart below, people “feel” pretty scared right now. As Bespoke commented, “While readings above 50% have been more common this year, in the history of the survey since 1987, less than 4% of weekly readings have been higher than this week's level of bearish sentiment.” For those of you that regularly follow these commentaries you know that such sentiment usually means we are closer to the end than the beginning of tough times.
In closing, don’t be “perma” when it comes to investing whether perma…bullish, bearish or static in your approach. The only “perma” that should define your approach is perma- process-oriented. Keep an open mind, keep calm, and keep an eye out for opportunities – just remember they are usually disguised as recent disappointments.
Have a wonderful Labor Day weekend,
Tim and the team at TEN Capital
Data, Just the Data
Data points this week included: