Monthly Outlook: June 2023
The current news for investors centers around rising interest rates, raising the debt ceiling, bailing out failing banks, the possibility of a recession, narrow breadth where big gains from 10 Big Tech stocks are propping up the whole S&P500, and so much more! No wonder Consumer Sentiment readings are soft. We could go deep into the weeds on all of this, but this month I’d rather step back and focus on the bigger picture. I believe there are four steps to being a better investor that might add more value to you than the current news. The four steps are Goals, Markets, Strategy, and Evaluation. But please don’t stop reading here, continue to learn why.
Goals, What Do You Really Want?
I think all investors would be well served to deeply think about their goals and to clearly articulate to their advisors what they really want. And to be fair, advisors could do a better job of uncovering goals, too. The industry standard is for advisors to ask investors a few initial questions and then recommend one of the advisors’ buckets or models. Then they are supposed to compare their performance to the blended benchmark that corresponds to the portfolio model. In theory, this is the proper way to manage money and is how most boards manage endowments. We do it, too. The problem is that some investors don’t buy into the blended benchmark goal and are then dissatisfied with results.
If you are invested in a globally diversified 25%/75% bond/stock portfolio but you constantly compare your portfolio to “the Dow” or “the NASDAQ,” maybe your goal should simply be to beat the Dow or NASDAQ. The blended portfolio might be better for you in theory, considering the trade-off between return and risk, but you want what you want. Or maybe you want to beat your brother-in-law or to beat an absolute 8%/year return. Your goal is unique to you and any goal is OK. The point is that you and your advisor need to agree on the goal. That way, the advisor can construct and manage the portfolio to meet or beat your real expectation.
Which Markets Are You Going to Invest In?
Most investments are basically either debt, equity, or commodities. But there are thousands of sub-components and wrappers around those basic choices. What markets or asset classes are you going to invest in? US Stocks, International Stocks, and Bonds are the basics. What about sectors like Technology, Financials, Healthcare, etc. Do you care if you invest in individual stocks, mutual funds, or ETFs? What about commodities, real estate, currencies, cryptos, private equity? If your goal is to beat the S&P500, but your advisor diversifies into international stocks, bonds, and commodities and any of those markets underperform, the advisor will never be able to meet your goal. Be sure that the markets you’re investing in support the goal in step 1.
What Investment Strategy Will You Use?
There are as many investment strategies as there are markets. You can use fundamental analysis about the markets and economy to inform your buy and sell decisions. You can use technical analysis and look at charts to recognize patterns. You could just listen to CNBC or read a blog. We prefer to use a systematic trend-following strategy and focus on active allocation. Some strategies are better for upside growth, some are better at downside protection, and some (like ours) aim to do both. The key is to have a written strategy and be consistent with it. Then you can evaluate if your performance is due to strategy or luck.
Evaluate Goals, Markets, and Strategy, then Performance
Many investors are bottom-line focused and just want to evaluate absolute returns. But if you made 8%, is that good or bad? It depends. The better way to evaluate your investments is to review each step. Are you and your advisor in sync with your real goal? Do you agree which markets you will invest in (and which ones you won’t). And do you buy in to the strategy? If you’re a chartist, but your advisor uses fundamental analysis, you’ll never be in sync. And, of course, the actual returns are a critical part of the analysis. Did you make money, and keep it? By making sure you’ve evaluated all these components, and that they all align with your goals and preferences, you’ll be more likely to be both successful and content.