There are certain timeless truths about money that generations of Americans have used to grow and preserve wealth. These truths are simple—as basic as building blocks—and when we stack them together, they form the foundation of a financial plan that can help us weather difficult times. These principles are so important, in fact, the CFA Institute dedicates most of the third year, final exam, to this material.
The process to achieving investment success—the same process we use when we work with our clients—is this:
- Evaluate risk and return—understand your needs for income and investment growth based on your willingness and ability to take risk
- Allocate assets—divide your portfolio between risky investments (stocks) and safe investments (bonds/cash) to satisfy your needs
- Select investments—use a systematic approach to identify quality companies trading at good values
- Locate investments—consider tax and planning needs to place the rights assets in the right place
- Overlay options—supplement your assets with equity options for added income or protection, when necessary
- Manage expectations—encourage you to keep a long-term perspective to avoid getting caught up in the short-term emotion of the markets
There are several forces that work to undermine these principles, causing us to lose sight of our bigger goals, taking us off track. The financial and mainstream media thrive on broadcasting dramatic news. And when investors increasingly search terms like recession, job losses and market collapse on Google, the media responds with more inflammatory talk. We can make the situation worse by reacting. But instead of worrying whether this time is different and making poorly timed, emotionally charged decisions about our money, we do well to remember that Rome was not built in a day, and it wasn’t destroyed in a flash crash either.
The filter we need to help us during times like these is patience. One way to do that is to ask, “Is this moment going to be remembered in ten years?” Even during troubling times—Y2K, 9-11, the Dot-com bubble, the credit crisis, the COVID pandemic, today’s economic and societal problems—great companies with solid management teams don’t just survive these periods, they are stronger and better for having gone through what they did. Companies like Microsoft, Costco, Southern Company, and Chevron, to name a few of the leaders in our portfolios, managed through difficult times before, and they will continue to do so today.
As we mentioned in a previous post, we offer three investment strategies beyond our flagship Core Stock portfolio. One of those, our Global Dividend portfolio, recently crossed the one-year mark with great success. The portfolio has fifty stocks evenly divided between the US and international markets. Of course, these companies meet our quality standard, but we also look for companies capable of faithfully returning capital to shareholders through a stable and growing dividend, a sign that the management teams of these dominant companies will reward our patience even in difficult times. The portfolio boasts a yield of 3.9%, a pleasant bonus given most of these companies are trading at a discount to their fair value, and they still have room to grow.
To be sure, the Fed and Congress will continue to act to get inflation under control and to prop up the economy. They have complicated analytical processes that often result in confusing policies, and until investors are assured that we are on the right side of these challenges, implementing the government’s strategies will undoubtedly cause volatility in the market. Until then, we remember that investing is only one part of the process. The others—maintaining balance, focusing on the long-term, managing our expectations and even watching our spending and planning prudently—will be helpful skills during times like these.
Please contact us with any questions you have. Our door is always open. And please know we wish you and your family the best as leaves begin to fall.
– Steve Davenport, CFA