Just nine months ago, U.S. stock indexes were hitting all-time highs as the bull market was passing its six year anniversary (from the March 2009 lows). Since then, the Federal Reserve has begun raising short-term interest rates, oil has continued its precipitous retreat (from its recent high, oil is down 68%) and emerging markets have teetered as a result of their dependence on higher oil prices and a more robust Chinese economy. In addition, fickle investors are now skeptical of long-term domestic growth opportunities in the current economic environment. No wonder many investors are confused and a bit exhausted.
What the beginning of 2016 has made abundantly clear once again, is that world-changing events are unpredictable. Therefore, one must not base an investment strategy on the ability to predict the future accurately. Market-timing, momentum investing and buying long-term bonds are strategies to avoid for this reason. Successful investing is not dependent on speculating about the future, but in taking advantage of mispriced opportunities in the here and now.
Since the future cannot be predicted with certainty, we believe an investment portfolio should emphasize high-quality, individual stocks and bonds. When the economy does weaken, it is vital to hold companies which will not only survive, but are likely to experience growth when the economy then recovers. A prudent investor should assume that volatility is likely to be an integral part of any long-term investment time horizon.
Here are a few things the Compass investment team have been thinking about and doing during these recent volatile times:
It is true that the investment landscape is continually changing (market are moving up and down daily—sometimes by 1, 2 or 3%), new investment products are being introduced and economic/political forces are always shifting. Nevertheless, following certain time-tested investment disciplines is likely to continue to produce desirable results. Successful investing is not a matter of trying to determine the unknowable (such as the direction of the market in the short-term, interest rates or the economic growth of China). Rather, it is a matter of establishing a sound long-term investment policy and following sensible investment disciplines in implementing this policy. Once these are in place, much anxiety and distraction are eliminated, and the investment team at Compass can move on to the fun of looking for mispriced, quality investment opportunities and passing them on to you, our clients.Download PDF