The substance of my typical talk is to look at what it takes to worry effectively. In the past several years, for example, we have been extremely worried about a weak dollar, as well as a strong dollar. We have worried about high oil prices, as well as low oil prices. About China’s rise, as well as China’s collapse. I could add other examples to this list, but you get the idea. The point, of course, is that the headlines generate most of the angst. Over time, however, conditions change and the world doesn’t end. This is the underlying idea that drives most of what we do here at Commonwealth. The world will keep spinning, and this too will pass.
Sometimes, however, things really are changing, and we need to respond to those changes. How can we tell what is worth worrying about, and what isn’t? The answer, which I hope won’t surprise you, is exactly the metrics we follow in the monthly economic risk factor and market risk updates. The metrics themselves are important. But even more important? How we look at them: not at the current number, necessarily, but at the change over time. Any individual data point may be nonsense. But if we look at changes over time, it gives us not only context but significantly more reliability.
That method works, but it is limited. It is a good guide for the next year (maybe two), but it doesn’t give us much guidance beyond that. When I talk to clients, their worries tend to extend beyond that time frame. How can we effectively game out (i.e., worry effectively about) events over the next 5 to 10 years?
The first step is to be very humble about our ability to do so at all. If I had been asked in 2009 whether the market would triple over the next 10 years, I would have said “not a chance.” Ten years ago, we were at the nadir of the crisis, and it was a real question whether we would even be here, as investors, in 10 years. Ten years before that, if I had been asked whether the market would collapse by 50 percent, recover, and then do it again, I would have said “no way.” A rational market couldn’t do that, right? But that is just what happened.
So, we have to be humble. But we can also make some conclusions based on the lessons we have seen repeatedly over various 10-year periods. First, people will be people and will keep making bad decisions, but the system will survive. Second, whatever happens will likely reverse. In a dynamic system like the U.S. economy, bad times will recover—and good times will collapse. Third, this pattern is normal, as economies do go in cycles, and nothing to worry about.
When I talk to clients, these are the points I make. We are in a good period. At some point (probably not all that long), we will be in a bad period. But that will then reverse again, into another good period. If investors have a properly constructed portfolio, they will limit the damage from the bad times and be in a position to benefit from the good times. Rinse, wash, and repeat. None of which has anything to do with the headlines. Worrying effectively over the next decade is all about understanding what is normal—and not letting it get to you.
Although, of course, none of these points are reflected in the headlines.