“Prediction is very difficult, especially if it’s about the future.”
— Niels Bohr, Danish physicist, 1922 Nobel Prize in Physics
Our job is to help our clients make good long-term decisions with respect to their portfolio allocation, investments, and most cherished financial goals and objectives. Although past performance never guarantees future success, to the extent we have any facts, they come from the past. The future of investing is totally unknowable, yet the decisions we make today will play out in the future.
To take a couple of terms from strategic military planning, the “operational environment” (OE) is volatile, uncertain, complex, and ambiguous (VUCA). Forecasting in the OE we have now is impossible. So far this year, we have experienced a pandemic, a boarded-up economy, oil price collapse, and extremely aggressive FED action. The Washington Post said this is “the worst public health crisis since 1918 and the worst economic crisis since 1933…and the worst civil unrest since 1968.”
We agree unequivocally that forecasting is impossible now…or ever. So if forecasting is impossible, let’s just stop making, reading, or listening to forecasts. As we have suggested before, just turn off the TV. You are investing for the future. Regardless of whether you are an accumulator contributing to your future retirement fund through a workplace qualified plan or you retired 20 years ago, you simply must practice rationality under uncertainty. We cannot predict, but we can plan.
Think back to what might feel like years ago, January 1, 2020. What were you investing for? What were your most cherished financial goals at the beginning of this year? Many of you were planning for a dignified, independent, worry-free retirement for you and your spouse. In addition to retirement income planning, perhaps you were thinking of funding educational opportunities for your children and grandchildren.
Now, only 5 months later, have these goals changed? Probably not. (If so, please reach out to us.) The one thing that has changed is this: your goals are five months closer to being a reality. This year’s pandemic has not changed your future retirement date or the first day of college for your 10-year old.
At the beginning of this year, last year, and for a long time, we have agreed you must be invested in a well-diversified portfolio that would include an allocation to quality equities (stocks), of both U.S. companies and foreign companies. The fact is, equities give you the greatest historical probability of reaching your goals.
Equities are volatile; at times, prices rise sharply and fall sharply. The fact of the matter is that once every five years or so equities may lose about 1/3 of their value. We just saw this, when equities fell 34% between February 19, 2020 and March 23, 2020. We didn’t necessarily anticipate such a decline, but we planned for it. If you are an accumulator, you continued to make contributions to your 401(k) or perhaps put idle cash into the market. If you were already retired, you did not make irrational, emotional reactions to sell out of equities in a falling market. Instead, you planned to stand fast and draw on cash reserves in a falling market.
Thus, in a well-diversified portfolio of quality equities, there has historically been a critical difference between a severe but temporary price decline and a permanent loss of investor capital. As mentioned above, equities prices have declined by a third about every five years since the end of World War II. During these periods, we can begin to worry about a permanent loss of capital. Yet however deep the price declines may have been in the interim, the long-term market appreciation has erased those declines and carried equities on to new heights.
To the long-term investor, this time is not different. The “future” of “now”’ is always unknowable and it always will be. That is why all current commentary is irrelevant to the long-term, goal-focused investor. Your plan contemplates such periodic drawdowns that lead to long-term growth. Keep your focus relentlessly on your plan!