This article is part of Morningstar's "Perspectives" series, which is a series of articles written by third-party contributors.
I tell my family and friends to invest only money they won’t need for five to 10 years, forget they have it and get rich slowly. Many of them express disappointment, wanting something more bold and tactical along the lines of a get rich quick approach. My best investments have been those where I made consistent contributions and stayed the course. The less often I look at or fiddle with my investments, the better they seem to do. Call it the “set it and forget it” strategy of investing. Call it SIFI investing.
The less often I look at or fiddle with my investments, the better they seem to do. Call it the “set it and forget it” strategy of investing
I like comedies more, but horror movies have that scene we all know. Two people walk into a bar or a cave, or a graveyard littered with zombie parts, and one says to the other: “I’ve got a bad feeling about this.” Despite the market’s rally this year, that’s how a lot of investors may feel today.
The outflows from equities and into bonds since the Lehman Crisis have been of historic proportions. Who can blame investors for being fearful? Just this year, headlines covered the fiscal cliff, political ineptitude and deficits in the United States, a slowdown in China, the sovereign crisis in Europe, risk to the euro structure and a potential Israeli-Iranian conflict. Meanwhile, a lot depends on politicians in the next six months. On that count, I’ve got a bad feeling about this too.
I hope, however, you do not let the feeling scare you from equities. Bad headlines are the friend of long-term investors putting money to work. I believe this outflow from equities and into bonds is going to end badly for investors. While there are opportunities in riskier credits, US Treasuries are not promising. They have provided about two percentage point returns above inflation over the past 80 years. With 10-year US Treasuries yielding about 1.5-2%, real returns are likely to be negative going forward if inflation returns even to modest levels. If inflation does return and rates rise, there’s principal risk in bonds too.
Of course there’s room for a fixed income allocation in a long-term portfolio and credit analysis can enhance returns, but the strong disdain for equities today, or at least those without high dividends, reflects fear. Fear creates opportunity. In the last few months, I’ve noted stocks rally on good but hardly unsurprising news. It seems to me that even equity investors reflect pessimism, almost as if they really don’t want to be there. Stocks are priced such that it does not take too much good news for them to go up.
I have become more contrarian in my approach over time and that is an important influence on my writing and letters. My favourite letter was when we contrasted the front page headlines between the September 2007 market highs and the March 2009 lows. Stocks have compounded at a 27.5% annualized rate since the March 2009 low. The rosier the headlines, the closer the market was to a peak and vice versa. It is hard to be contrarian but it can pay. Investors, like doctors, should first do no harm. Don’t damage your portfolio by swapping out of stocks after the market has fallen or after even a short rally because economic and market crises dominate the headlines. Remember SIFI — set it and forget it.
The average investor is far from contrarian. I remember vividly when a strategist from a top-tier investment firm in the mid-1990’s told me that while the S&P 500 had grown at 13% per year over the prior 10 years, the realised equity returns of his firm’s retail client base, on average, had compounded at only 5% per year. The S&P would have turned $100,000 into $339,000 during that period, but their average investor ended with $163,000. Not everyone should own 100% equities, but many people have poor timing within the equities portion of their portfolio. As the professional investor Fayez Sarofim put it: “Nervous energy is a great destroyer of wealth.”
Another way to look at this is to stay within your bounds. Take an appropriate level of risk, or allocation to equities, in your portfolio that you can stomach during the punishing times, and still hang on. Stay disciplined on your allocation to equities. If you do anything, trim it when it grows too large as a percentage of your portfolio due to appreciation, and add to it when it declines due to difficult markets.
The original, full version of this article was written by Jim Goff, who is the director of research at Janus in the US. The article was first published on Morningstar.com, a sister site to Morningstar.co.uk. To read the full, longer version of this article, click here.
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The views contained herein are those of the author(s) and not necessarily those of Morningstar. If you are interested in Morningstar featuring your content on our website, please email submissions to UKEditorial@morningstar.com.
Janus Disclaimer
Please consider the charges, risks, expenses and investment objectives carefully before investing. Investing involves market risk. Investment return and fund share value will fluctuate and it is possible to lose money by investing. The opinions are those of Jim Goff as of October 2012 and are subject to change at any time due to changes in market or economic conditions. The comments should not be construed as a recommendation of individual holdings or market sectors, but as an illustration of broader themes. Past performance is no guarantee of future results. There is no assurance that the investment process will consistently lead to successful investing.
