Updates and Principles
Market Updates
Stocks across the globe returned about 6.1% in the first quarter of 2023 (“Q1”).¹
Global stocks are still down from their high at the start of 2022, namely by 9.0% through the end of Q1. That is a welcomed improvement however, as these stocks were down by as much as 21% from the same high through the end of last September.
But it is important to maintain a longer-term perspective, which in this case only means looking back five years, over which time these same global stocks earned 6.8% per year on average through Q1 despite the drop we experienced last year, not to mention the more significant drop experienced because of COVID in 2020.
The battle against inflation has nearly reached another positive turning point. Take a look at this chart:
The first positive turning point was when inflation began steadily declining from its 40-year high of 9.1%. But another has nearly occurred at the end of Q1 when the yield on one-year US Treasury bills almost exceeded inflation.² Even the safest one-year investment on the planet needs to earn a return above inflation (known as a positive “real return”) in order for the economy and markets to function in a healthy and sustainable way. Given the pace at which inflation has been declining recently and the fact that all but one Federal Reserve official now projects that there will be at least one more interest rate hike this year, the crossing of these two curves seems likely in the months or quarters ahead.
The last time that we saw such a reduction in inflation, with Treasury bills reclaiming a positive real yield versus inflation, was in 1982. On that occasion, the S&P 500 tripled in value over the subsequent five years. That could have just been a coincidence, and as conservative financial planners, we don’t count on history repeating itself, but it is an encouraging historical reminder that over time, remaining committed to a well-diversified portfolio generally yields favorable results.
Quantum Portfolio Updates
After an extensive period of research, discussion, and debate, we are pleased to announce that the Investment Committee (“IC”) at Quantum has updated the allocations of the equity (stocks and real estate) portion of our client portfolios. What I would like to share here is a reminder of the underlying investment principles used at Quantum that guide our IC and our advisors as we provide portfolio design and advice for clients.
Quantum Investment Principles
Goal-Matching. A cornerstone of any investment plan uses bonds for essential and short-term goals and equities (stocks and real estate) for discretionary and long-term goals. The distinction between short-term and long-term depends on the investor’s goal and tolerance for uncertainty.
Total Market Diversification. Equity investing captures the financial benefits of innovation and ingenuity. But it is impossible to predict in advance which companies, or even which countries will create the most value over any period of time. Therefore, we do not stock-pick but rather invest in the total global equity markets that include roughly 10,000 companies across 44 countries to capture the totality of human productivity.
Dangers of Stock Picking. Research on the performance of investors who pick stocks shows that those who happen to outperform the market over a period of time most likely underperform over the next similar period of time. This suggests that picking winning stocks is more luck than skill.
Drivers of Higher Expected Return. There are drivers of higher expected returns amongst stocks. Small companies have a higher expected return (and therefore more risk) than large companies. Low-priced companies, or “value” stocks, have a higher expected return than high-priced companies, or “growth” stocks. High-profit companies have a higher expected return than low-profit companies.
Declines are Temporary Bumps Towards Long-Term Progress. Investing in equities means having to endure frequent but temporary sharp declines to capture their premium returns over time. The only reliable way to capture the full return of equities is to maintain continuous ownership.
Forecasting & Timing Lead to Regret. The economy cannot be consistently forecasted, nor the markets consistently timed. The best time to buy is when you have the cash, and the best time to sell is when you need the cash.
Temperament Outweighs All Else. The essential challenge to successful investing is neither intellectual nor financial, but temperamental: it is how one reacts, or chooses not to react, to events and the consistency with which one continues to act on a plan. Be keenly aware of the emotional roller coaster that investor’s experience that can be exacerbated by sensationalistic and unsettling news headlines.
Focus on What You Can Control. A Quantum advisor can offer expertise and guidance to help you focus on actions that add value and are in your control. Such as creating an investment plan to fit your needs and risk tolerance; structuring a portfolio targeting the drivers of expected returns; maximize opportunities and minimize risk; reduce portfolio expenses, minimizing turnover and taxes; and avoid reactive investing and take advantage of market volatility by rebalancing and tax-loss harvesting.
Planning Leads to Success. Successful investors are goal-focused and planning-driven, while unsuccessful investors are market-focused and performance-driven. The only benchmark that ultimately matters is the one that tells you whether you are on track to reach your goals.
In the coming quarters, I will elaborate on various principles in more detail. In the meantime, your advisor would welcome the opportunity to discuss them as well.
¹ This is based on the allocation of global stock investments used by Quantum. Global equity mixes across client accounts ranged from 6.1% to 6.5% depending on specific funds used.
² We are using here the yield on US Treasury bills that will be earned in the next 12 months (if held to maturity), so “forward-looking,” while the inflation rate refers to the change in prices (of goods and services) over the past 12 months, so “backward-looking.”
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