Investing’s Holy Trinity

This market commentary has been contributed by Conor Feldmann, Sr. Portfolio Manager & Shareholder, as a part of his blog Demystifying Markets. To read more on current events and market analysis from Conor, subscribe to Demystifying Markets here.

Maybe you’ve noticed that financial markets, and the world at large, are particularly chaotic. When surrounded by chaos, I find it helpful to return to the basics. Doubling down on essential doctrines can help us chart a path through an ominous and hectic future. In the world of investing, three of those essential doctrines are our focus today. And as I write this at the start of Mark Wahlberg’s 40-day challenge (NBC’s laughable rebranding of the Christian observance of Lent as if it’s Wahlberg’s new workout regimen), we’ll refer to them as Investing’s Holy Trinity.

1. Evidence-based optimism 

Every single day since Truepoint’s founding in 1990, we’ve bought and held stocks for our clients. We’ve done it through the bursting of the Dot-Com Bubble, 9/11, multiple wars, political upheaval, a global financial crisis, pandemic, inflation, several recessions, and even more bear markets. Why? Because progress is inevitable. Civilization has a long history of overcoming setbacks to achieve new heights. And the best way to profit from the resilience and ingenuity of the human race is by investing in stocks. 

The reward for bearing those risks? Since Truepoint’s inception, the S&P 500 is up 3,400%. 

2. Long-term horizon

Our evidence-based optimism should not be confused with naïve indifference. The grinding march toward higher highs is filled with brutal declines. In the midst of a falling market, when things are seemingly getting worse, the best way to see the light at the end of the tunnel is to remember that all declines have one thing in common: they end. Every bear market has eventually given way to new all-time highs.  

Here are a few nuggets that may help you maintain a long-term perspective: 

• The average intra-year decline in the stock market is 15%. Every handful of years, historically, stocks fall by double that. Those should be your baseline expectations.
• The average daily return for the stock market is small, about 0.05%. The average daily volatility is much larger, about 1%. That means that if you observe the stock market daily, 95% of what you see is noise.
• This chart. Print it and tape it to the bathroom mirror, if it helps.

3. Refusal to play a loser’s game

We’ve established that both progress and setbacks are inevitable. A natural question is, “Can we sidestep the setbacks and only partake in the progress?” Industry legend Charley Ellis refers to this as “the loser’s game.” The “game” is timing the market, chasing trends, or concentrating your portfolio in a few stocks that you hope will outperform. The odds are firmly against individual investors who play the game, where one critical mistake can cause irreparable damage. 

Forgo the game and instead build a portfolio and a financial plan that places the odds in your favor. 

From the portfolio perspective, that might mean owning high-quality bonds, because having a long-term perspective only works if you can survive the short-term volatility.  

From the financial plan perspective, it means modeling the impact of large declines and discussing strategies in advance, so that when declines occur, decisions are made in accordance with the plan, instead of in the heat of the moment.  

Ultimately, it means appreciating bear markets not just as an unavoidable price that investors occasionally pay to reap the long-term rewards of the market, but also as opportunities to implement additional strategies that will strengthen their financial plan. When things intensify, rely on your planning to avoid being lured into the game.  

Know thy enemy

It would be flippant for me to advise you to simply “tune out the noise.” That’s not possible in today’s world, and I don’t want to discourage anyone from staying informed. But as you follow the news, recognize that the media is actively working against Investing’s Holy Trinity. Evidence-based optimism is disregarded for “if it bleeds, it leads.” Long-term horizons aren’t a consideration when covering the crisis du jour. And a message of “don’t worry, we’ve planned for this ahead of time” doesn’t sell advertisements or high-commission products nearly as well as a MARKETS IN TURMOIL segment.

As you invest your way through an uncertain future, channel your inner Mark Wahlberg. Choppy waters will persist well beyond the next forty days. When the storm arrives, reacquaint yourselves with Investing’s Holy Trinity to stay afloat. 

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