time horizon

The Power of Patience


One of the basic principles of investing is that the longer your time horizon, the greater the yield you can generally expect. On certificates of deposit at the bank, you get higher interest on longer maturities. If you are buying US Treasury bonds, the 10 year bond usually has a higher yield than the 1 year bond. Conversely, if you are taking out a loan, you pay higher interest on a 30 year loan than on a 10 year loan.

If you’ve got a long time horizon, this seems like an easy way to maximize your returns. But there is no such thing as a free lunch—the only reason issuers will pay you more for a longer time to maturity is because they are hoping to get something out of it.

Some individuals may have short term outlooks, and be easily spooked out of the market. That’s bad news for investment companies and debt issuers who find their money reserves drying up when investors start cashing out. If investors lock into longer terms the companies are free to implement longer term strategies with less of a worry about investors abruptly pulling the rug out from under them. That is why they are willing to pay higher yields to keep the money in for longer.

It sounds like a win/win situation, but there are risks to buying longer term investments. A lot can happen in thirty years! Maybe the investment landscape changes and what looked like great returns at the time turns into chump change when newer investments start yielding more. Maybe the issuer runs into trouble, raising questions about the security of the investment. If you were holding a shorter term instrument, you might have avoided those problems.

The good news is that you, too, can benefit from a longer term perspective—without needing to lock your money away in illiquid long-term investments. If you are not jumping in and out of investments in response to short term swings you can cut down the drag on your portfolio and potentially enjoy better returns. Even better, you can specifically seek out more volatile investments that are less popular with investors and may command higher returns than more stable, popular investments. By investing for the long haul, you may enjoy the higher returns that may be available on long-term money.

And, because you did not actually have to lock in your investments for decades, you are still able to react to major upheavals. You can ride through the small bumps without hurting yourself by selling out low and still be able to pull out if you need to.

Of course, staying the course may be easier said than done. Tolerating volatility has been a path to higher returns in the past, but not everyone is capable of doing that. We believe there is an advantage to investing for the long term. But one may retain liquidity—the freedom to change tactics—instead of committing to a course for years or decades to come. Clients, if you want to talk about your time horizon, please call or email us.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results.

The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.

CD’s are FDIC Insured and offer a fixed rate of return if held to maturity.

Government bonds and Treasury bills are guaranteed by the US government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value.

This is a hypothetical example and is not representative of any specific investment. Your results may vary.

Investing involves risks including possible loss of principal.

A New Way of Looking at Your Wealth


A paradigm is a typical pattern or example of something, a model. It is a set of concepts or mindsets. We frequently find ourselves at odds with the old paradigms about investing and finance, as you know.

One of the most irksome things (to us) about investing is the use of the terms ‘aggressive’ and ‘conservative’ in describing an investor’s investment objective. The industry-standard scale goes from conservative to aggressive in five steps, with prescribed mixes of stocks and bonds for portfolios at each step. At the conservative end, the portfolio would be nearly all bonds; at the aggressive end, nearly all stock.

But is it really conservative to expose wealth to the long term risk of purchasing power loss and missed opportunities that accompanies investing in fixed dollar portfolios of bonds and cash? We don’t think so.

An all-fixed income portfolio is typically suitable for short time horizons, where it is important to know that portfolio value will remain relatively stable. So in place of ‘conservative,’ we would use ‘short term’ to describe that end of the spectrum.

By the same token, is it really aggressive to invest for growth of capital over extended periods? As difficult as it is to make one’s money last a lifetime, growth may be handy for long term investors—for many, it can be crucial to financial success.

So instead of ‘aggressive’ for the other end of the scale, we would say ‘long term’ makes far more sense. Thus, instead of the ‘conservative to aggressive’ axis, we believe the continuum should run from ‘short term’ to ‘long term.’

It is a new paradigm, so to speak, for describing investment objectives. It replaces abstract and unclear terms with simple, easily-understood phrases. And it avoids the unfortunate connotations of conservative as prudent and aggressive as stupid. (Doesn’t ‘aggressive driving’ really mean ‘stupid’ driving?) All in all, we think this is a more useful way for you to think about your wealth.

A related issue confuses the conventional wisdom. The old paradigm mistakes volatility for risk. That may be at the heart of the misguided use of the word ‘aggressive’ since long term portfolios necessarily do fluctuate. (We explained why we believe that aspect of conventional wisdom is counterproductive in this short essay.

The bottom line: we always try to think about the best way for you to meet your goals. We look at the world and strive to see it as it is, not in accordance with some stale textbook written in a different age for different conditions. We cannot know that our view is correct, and we have no guarantees. But we do work at gaining a better understanding of how to grow your wealth.

Clients, if you would like to talk about this or any other aspect of your situation, please email us or call.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results.

No strategy assures success or protects against loss.

Stock investing involves risk including loss of principal.

Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price.

Two Ideas About Time

© Can Stock Photo / Klementiev

Two ideas about time affect our plans and planning when it comes to investing. There is conflict between these ideas, so we need to examine them more closely.

The concept of compounding wealth over time is alluring and powerful. Something that doubles every eight years would be sixteen times the money in thirty-two years!

What does thirty-two years mean in the context of planning for a lifetime? It is the distance between age 30 and when people begin to retire. Of two people at age 60, one of them might reasonably expect to be alive thirty-two years later. You may think that thirty-two years sounds like a very, very long time. But 62 year olds will tell you that age 30 seems like yesterday. Thirty-two years clearly is a pertinent time frame for life planning.

This is key because long time horizons are generally tied to long term investment results.

The other idea about time rests in one of the ultimate truths of our existence. We may think about the past, or plan for the future, but where we live each second is RIGHT HERE, RIGHT NOW! The survival of the human species in earlier ages probably required us to be vigilant of potential threats and lurking dangers at all times. There was nothing to be gained by thinking about tomorrow if a lion was going to eat you today.

So human nature has a bias toward focusing on the present. This manifests itself in unhelpful ways in modern society. We tend to think that current trends or conditions will persist—even when they are unsustainable. Some of us seem to believe there will always be time later to take care of longer-term priorities or goals. We have trouble picturing future changes.

The focus on the present also may explain why so many lack the context and background that history can provide. We have heard people say “This has never happened before” about many things that are a recurring feature of our history. By not understanding challenges overcome in the past, today’s problems may trigger an unwarranted sense of danger.

The focus on the present is in conflict with the idea of compounding wealth over time. Our role is to try to make sure that people have what they need for the present, have a cushion for emergencies, and keep a long term focus for their long term investments.

In other words, balance is key. Call or write if you would like to talk about the balance in your plans and planning.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

Broken Clocks and Market Timing

© Can Stock Photo Inc. / Pshenichka

The first quarter of 2016 is drawing to a close, and as of this writing the S&P 500 Index is roughly where it was at the start of the year, hovering a meager half a percent under the December 31 close of 2043.94 after having peaked half a percent higher earlier last week.

One might conclude that it has been a very boring three months for the stock market—we’ve spent 90 days to get back to where we started from. But we’ve had quite a rollercoaster in-between. In the first half of the quarter the S&P dropped about 10%, only to have an equally dramatic bounce back.

We had some calls from worried clients after that drop. (Not many, though—we know our clients, and they know us and our philosophy.) We would certainly like to take credit for having righted the ship and reversing the decline. But the truth of the matter is that there is a lot of random noise in market movements. We believe that we may be able to capitalize on long-term market trends; we do not pretend to be able to predict what the market will do day to day or month to month.

We do know that every once in a while there will be a short-lived 10% correction in the market, so we don’t believe in panicking when the markets take a dip. But we don’t know when, or how long, or how deep a periodic correction will be.

They say that even a broken clock is right twice a day. Market timing often feels the same. Even if you have a deeply held conviction that a market is due for a move, you may have to wait an unpleasantly long time before you turn out to be right. In hindsight market moves seem obvious, and it is tempting to look back and curse having missed the opportunity to sell at a top or buy in at a bottom. But at the time, nobody knew that they were at the top or the bottom. If we could accurately predict when the top or bottom would hit, we wouldn’t be here dispensing financial advice. We’d be sitting on a beach somewhere in the tropics, having rum runners dispensed to us.

Maybe someday we’ll get a better crystal ball that can make those predictions. Until then, we’ll just settle for getting rich the slow way and leave market timing to the gamblers and bookies.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

Volatility Versus Risk

© Can Stock Photo Inc. / webking

In the investment world, we often speak of the riskiness of an investment in terms of volatility: if an asset’s price changes rapidly and unpredictably, it tends to be spoken of as risky, and if the price tends to stay the same, it is usually regarded as “safe.”

In the short term, this is reasonable. If you have $100 today and you know that you will need $100 a week from today, the only sensible move is to put your money someplace where you know its value won’t change. Investing it in a volatile market means you might make a few extra percent your original money, at the unaffordable risk of coming up short when you actually need your money.

When we start to look at investing for the long term, though, we can start to see the difference between volatility and risk. Suppose you take your money and bury it in a hole in the ground for 30 years: this is about the least volatile “investment” you can possibly make. You can reasonably expect that the value of your buried money will stay nearly constant. Yet, because of the existence of inflation, it is almost a certainty that your money will lose a lot of purchasing power over the course of 30 years. Essentially you have a 100% chance of losing value over the long haul despite having virtually no day to day volatility.

On the other hand, if you took your money and invested it for 30 years, you can afford a lot of up and down movement during those 30 years—as long as the final value is higher than what you started with. If your investment has a daily gain 51% of the time and a corresponding daily loss 49% of the time, you can be fairly confident in your eventual profit—even though you’re watching the value go down several thousand times over the course of those three decades.

None of us know the future: there is no such thing as a guaranteed investment, and every investment incurs some form of risk. But it’s important to understand the difference between an asset’s volatility and its risk. For long-term investors, looking past day to day volatility can help you find bargains that are not as risky as you might think.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Investing involves risk including the loss of principal.

Outcomes May Vary

© Can Stock Photo Inc. / bedo

After the recovery from the 2007-2009 financial crisis, we had some time to converse with clients about how well things had worked out in the end. Memories of the turmoil had faded and account values began to make new highs.

The less-financially-involved spouse in a client couple interrupted this discussion to say, “I just have one question. A lot of our friends lost half their money in the stock market, a couple of them even had to go back to work after being retired. Aren’t we in the stock market, too? How come we came out OK and they did not?”

You probably know the answer to her question. Most of the unfortunates who lost half their money turned a temporary downturn into a permanent capital loss by selling out at low levels.

Please notice how we characterized the panic. The failure of big institutions, waves of mortgage defaults, unprecedented action by Congress and the Federal Reserve, massive dollar losses in the markets, and economic turmoil with high unemployment and massive uncertainty are all wrapped up in the phrase “temporary downturn.” But that is not what the unfortunates perceived. It isn’t truly how it felt in real time to nearly all of us who held on, either. We all experienced concern or fear or anxiety.

So we all faced the same circumstances, a series of major economic and financial events that were beyond our control. The thing that mattered, however, was the one thing in our control: our reaction to these events. From the perspective of the long view, by putting these events in the context of history and properly judging them over the decades of a lifetime… we see that ‘temporary downturn,’ not a panic that compelled us to ruin our financial position.

Most of our clients lived through episodes of 10% unemployment before, 16% mortgage interest rates, no gasoline at the gas stations, and inflation devaluing our money at double digit rates every year. This is not to mention wars, assassinations, school children coached for nuclear disaster, and recession after recession. All of these difficulties proved to be transitory, producing only temporary downturns.

Long term investment success does not require perpetual optimism or rose-colored glasses. It does take, however, either a sense of confidence that we will handle whatever challenges may come our way—or a resolution to maintain our investment strategies anyway. We covered the End of the World Portfolio in a prior essay and reached the same conclusion.

From a tactical standpoint, we do need to know where our income will come from, and have the stores of cash we need for short term goals. Our comments above pertain to long-term or permanent capital. It makes sense to consider reducing volatility at market high points if that better suits your needs, and we’ll be talking about that when the markets recover.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Investing involves risk including the loss of principal.