Occasionally, we believe it’s smart to take a break from the headlines and zoom out so far that all that’s left are principles. One way we can do this is to ask a few pointed hypothetical questions. Here’s the first one:
- Imagine you had to make the most money possible over the next month or year, what might you buy?
Some worthy considerations would be a hot stock, a crypto coin, or an option on a highly volatile asset. You might hit the jackpot, but it might also go to zero. Such is life when making short-term bets of this nature, which is why we seek to avoid investments like these despite their persistent allure.
Now, let’s look at the opposite end of the spectrum.
- Suppose you needed to ensure principal protection over the next month, or even a few years, what investments might you consider?
In this case, we could immediately rule out the investments noted in the first question because they are clearly too volatile to provide principal protection.
Some ideas that could meet our stability requirement might include keeping the money in a savings account, purchasing certificates of deposit, investing in Treasuries, or potentially, some high-quality, short-term bonds. With any of these options, we can be reasonably confident that we won’t lose anything and might even gain a little something while we wait.
Finally, if we extend our time horizon out to a decade or more, we’ll find that we need to think quite differently.
- Imagine you needed to produce a combination of the highest and most reliable returns over the span of a few decades, what investments might you consider?
With a timeline of that length directing our focus, we’d be wise to look toward historical probability and how various asset classes have performed over similar periods. Because, if done right, we might be able to minimize—or even eliminate—the possibility of losing it all while also earning a quite satisfactory return in the process.
In looking at how various asset classes have done over time, it won’t surprise you that history heavily favors a diversified portfolio of equities at anything over about ten years[1+2]. And over multi-decade periods, which is highly relevant for goals-based investors like us, the math becomes almost inarguable. So long as we stick with them.
As simple as this thought exercise may seem, it forms the foundation for the portfolio choices we make as we pursue your financial goals. Different time horizons demand different tools, and good portfolio management starts with matching the right investments to the right job.
When it comes to planning and investing, it’s important to note that we aren’t usually looking for the option that could provide the absolute best possible outcome because that will almost assuredly introduce the possibility of some untenable outcomes as well.
As an example of what we mean, Warren Buffett agreed with financial writer Ray DeVoe’s observation that[3],
“More money has been lost reaching for yield than at the point of a gun.”
This means that on the short end of our expected time frames (where our near-term needs reside), our objective is not to maximize yield or squeeze out every bit of incremental return, but to protect principal for when we need it most.
The point here is that, in all cases—both short- and long-term—what we probably want is the option that’s likely to provide the best-worst-case outcome. In other words, one that should, in all historical likelihood, achieve your goals across a broad spectrum of real-world scenarios.
Throughout this note, you may have rightly noticed that none of what we’ve shared about basic portfolio construction is informed by the headlines of the moment. That’s because rather than needing to pivot in response to each headline, our investment approach is to build portfolios that don’t require us to react at all.
To be clear, there are no choices that can guarantee success, so our intent is to get the odds of success in your favor as much as possible based on what your goals require and what we can reasonably learn from history. It is to that end we work.
If this note raises any questions or concerns, please reach out. As always, stay the course.
- [1] Market Return Data – Stocks vs Bonds vs Inflation
- [2] Over rolling 10-year periods: Crews Bank & Trust
- [3] 2010 Berkshire Hathaway Shareholder Letter
*Material created by Money Visuals, LLC, an independent third party not affiliated with Raymond James.
Any opinions are those of the author and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. There is no guarantee that these statements, opinions, or forecasts provided herein will prove to be correct. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Every investor’s situation is unique and you should consider your investment goals, risk tolerance and time horizon before making any investment. Past performance is not indicative of future results. This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete.
