Monthly Outlook: April 2024
The markets bottomed out last October, and they’ve been rebounding higher since. Our portfolios are up an impressive 15% to 18% over the past six months, depending on which iFolios model we’re looking at. And the Long/Short model is up a little more than 18%. The best news is that every market that we invest in remains uptrending as we begin April, so we’re still all-in and positioned for more growth.
Of course, we need to look longer term than six months and we know that the overarching goal of most investors is to compound growth and minimize loss from drawdowns to create real wealth over time. In 2022, we were able to show that we could reduce drawdown risk and volatility. And now, over the past six months, we’ve shown that we can capture upside and growth, as well. As a result, our two-year performance numbers look good, incorporating both a downtrend and an uptrend.
We can also share with readers that we added a couple of enhancements to our investment strategy in 2023 that will improve performance even more going forward. Specifically, we 1) are reinvesting faster after drawdowns to better capture upside and 2) added some internal audit procedures to ensure we’re invested according to our rules on a weekly basis. For all of these reasons, we’re optimistic about our ability to navigate the up- and down-trends that are sure to come across markets over the months and years ahead.
Daniel Kahneman, Age 90, Passed in March
You may not have known him, but Professor Daniel Kahneman of Princeton was a pioneer in the field of Behavioral Economics, and he won the Nobel Prize in Economics along with his academic partner, Professor Amos Tversky of Stanford in 2002. His work certainly influenced me and many investment professionals over the past couple of decades. You are more likely to have heard of their popular book, Thinking, Fast and Slow.
As psychologists, Kahneman and Tversky showed us that humans are prone to a range of behavioral biases that hinder us from making rational and evidence-based decisions. They argued that we most often use fast thinking, which is automatic, emotional, and intuitive. We then short-cut these quick conclusions to make decisions. In many cases, these fast decisions are good enough. But many times, our fast thinking leads us to errors because of our cognitive biases and faulty logic. For important matters, they argued that slow thinking, based on evidence, data, and logic is better and less prone to errors.
Investing, Fast and Slow
Behavioral Economics led to a new area of financial analysis called Behavioral Finance. In addition to classic fundamental and valuation analysis and assumptions about the efficient market hypothesis, etc., investment education now includes Kahneman’s work about how investors think and behave. The market, in fact, is irrational and therefore cannot be predicted. This idea may not seem that impressive to you now, but it was revolutionary just a couple of decades ago.
The implication for investing and portfolio management is important. And I hope Kahneman wouldn’t object to my co-opting his book title. Following his work, we would do better to avoid using fast thinking for investing. We should slow down and use evidence-based principles and logic. Avoid acting on instincts and emotions, beware of our biases that include anchoring bias, recency bias, confirmation bias, and others. These tend to lead to false confidence that we can accurately and consistently predict the future market. Since markets are irrational and can’t be predicted, we need to tune out sources that claim they can.
Instead, we should follow the evidence of what does work. These Nobel laureates were fans of using systematic and rules-based investment strategies including index funds and diversification. Even Warren Buffett has stated that most investors would be better off with an index fund portfolio. Our iFolios strategy does just this. We build a range of index ETF portfolios, globally diversified, to fit a wide range of investors. And then we simply add a trend-following overlay to reduce drawdowns when needed. It’s a logical, evidence-based, slow-thinking way to invest. And it works.