It’s amazing that with all the dramatic events that have taken place during the last few months – our economy continues to slowly recover. Consider the headlines:
- Unrest and changes in Tunisia and Egypt
- Civil war in Libya
- Protests in in Bahrain, Syria, and Yemen
- Earthquakes and tsunami in Japan and the ongoing nuclear challenges
- US kills Osama Bin Laden
Despite all this – our markets in January and February were solidly up, spurred by solid corporate profits and a broad consensus that while the global economy might not experience a fast recovery, it would continue to grow. March saw a setback with the crisis in Japan and clearly Japan’s economy will suffer for some time – but our markets dipped and rebounded in a fairly short period of time. The S&P 5001 was up 9.1% through 4/30/11 with 12 positive months out of the last 15.2
Learn to Live with Uncertainty
So far, this has been a good year. But will sudden events (might Bin Laden’s death result in more terrorist activity) change everything? We just don’t know. It is impossible to plan for developments that are by their nature, unpredictable. In light of this, investors need to take away three key lessons:
1) Don’t overreact to the news. Often a one or two day decline may be followed by an upswing.
2) Expect the unexpected. The only way we know to deal with uncertainty is to build risk controls into portfolios. We do this by:
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- Identifying your target mix of stocks, bonds and cash
- Using assets that are less correlated to the stock market
- Limiting exposure to any one company, sector or geographic region
- Doing a periodic in-depth analysis of each portfolio to rebalance to the target allocation
3) Avoid Overconfidence. There is one big negative to our risk-controlled approach to portfolio construction. Someone at the water cooler or on the golf course will tell you how they made a “big bet” that has paid off and have earned a bigger and better return. “Big bets” can result in “big losses” therefore we will not make “big bets” with your portfolio. Our most important job is to protect your assets from the unexpected risks.
We believe that a balanced approach and a long term view will reward our clients. Our approach may not be fun or sexy in the short term, but all the evidence at hand suggests that over time it can serve you well.
1 The S&P is an unmanaged index of 500 stocks and is generally considered representative of the US stock market. You cannot investment directly in the index. Most client portfolios contain a combination of stocks, bonds and other investments – so this is not representative of your return.
2 BTN Research