Market declines are typically named (albeit posthumously) in catchy headlines whether it be the Credit Crunch, Black Monday, the Tech Bubble or the PIGS debt crisis. The label for today’s market decline doesn’t jump out as easily. The ground underneath us seems to be shifting; and shifting quickly. No one title feels appropriate for today’s armed conflict in Europe, rising interest rates and bubbling inflation. It is an uncertain time. Notwithstanding all the human suffering, we must see this for what it is – one of the many moments of turbulence that we will experience on our long journey across the investment continent.
“On what principle is it, that when we see nothing but improvement behind us, we are to expect nothing but deterioration before us?” Thomas Babington Macaulay – Review of Southery’s Colloquies on Society.
Our lizard brains are hypersensitive to risk. This programming served us very well during pre-modern times when life was perilous. A wrong decision or mistake could lead us to not just harm; but death. We’ve heard this all before – especially in the context of investing. We all intellectually appreciate that we need to remain rational but putting this into practice is nail bitingly tough.
We see consistent evidence of this in Dalbar’s annual Quantitative Analysis of Investor Behavior report. For the last 28 years, they’ve compared the investment outcomes of the average investor versus the S&P500 (the broad US market). They are essentially asking whether the buy, sell and switch decisions of the average investor are superior to simply sticking with it. Their findings: each year, yes, each year, the average investor underperformed the unconscious market. Driven by emotion, the average investors instincts impairs their financial future.
What is your gut telling you to do today?
Headlines sell and attract eyeballs, but it is the slow, silent, incremental advancements that move us forward. I’m not suggesting that the path is never without interruption but the trend for human development is clear to me: upwards. A few weeks ago, I was casually told by my grade 7 son, Eliot, that the missing pieces of the human genome had finally been mapped. “What?” I said. “How come I didn’t read about this?” Well, this is a wonderful example of incremental process. As the sub-title of the Smithsonian article says: Scientists have deciphered the missing eight percent of our genetic blueprint, setting the stage for new discoveries in human evolution and disease. The last 8% is not glamourous – but wow! How many medical issues may this solve? How much potential will become unlocked?
How many other countless achievements are taking place in dark cover?
Our investments unfortunately don’t rise incrementally. Short-term performance is unpredictable and volatile. At times, it can leave us feeling unsettled or disappointed – other times boastful and overconfident. We generally focus on not making poor investment decisions when we are in a period of sharp decline. My contention, however, is that the more challenging environment is one of prolonged poor performance. And, here is the trouble, we are all most likely destined to spend an inordinate amount of time in this state: underwater.
Let’s look at the CI Signature Income & Growth fund to illustrate the point. This was Eric Bushell’s flagship fund before he retired last year. Many of you may remember Eric speaking at two of our dinners a few years ago. This is a globally diversified balanced mandate comprised of equities and fixed income. When we look at the last 15 years of annual performance results, I think most of our reactions would be “sign me up!”. Barring 2008, each year seems reasonable and doable. Below the surface, however, there is another story.
Source: Morningstar Direct
*Fund launched February 27th, 2007
**Performance until April 22, 2021
When we look at the complete period in more detail we see that there were prolonged periods of performance drought. In fact, the fund was below its high watermark half the time. Meaning, you felt like you were going nowhere, or worse going backwards, for 7 ½ of its 15-year history. This is when it feels like a true grind and other strategies and investments begin to look seductive. We start questioning the plan.
As industry commentator Nick Murray recent said: “What, after all, is the essence of successful long-term equity investing. Surely it is the continuing practice of rationality under uncertainty.” Rationality in that we know that these periods occur and that your financial and investment plan incorporate them. Rationality in reminding ourselves that we’ve been here before. Yes – under a different set of circumstances but like before this too will pass and we will be rewarded for our steadfastness.
