For most investors, their portfolios are their retirements, their kids’ college educations, and so forth. That makes it very hard to be objective. But for professional investors, like me and my colleagues here at Commonwealth, it is our job, which means we have to be objective. When we look at the recent declines, for example, we are not thinking about our own money, but about what those declines mean for our clients. In one sense, it is a bigger problem, with more lives and much more money at stake. But in another sense, it depersonalizes it—and lets us see things a bit more clearly.
Yesterday’s post is a good example. By looking at the historical valuation levels, we can see why the current decline is happening and use that knowledge to plan for the next steps. Crucially, we can plan those next steps over a longer time period than right now. When we look at our investment plans, we are, of course, aware of what is happening right now. But what we are planning for—and making decisions on—is for the future.
Here's an example. This morning we were discussing a meeting we had with portfolio managers for some of our holdings. The meat of the discussion was how they make their decisions: Do they sell stocks on the way up or sell them after they have blown up? Either option could be the right decision, but the process is key. As professionals, we need to look at where things are compared with where we think they should be and will be—and act accordingly. We want managers to buy or sell based on where the market is going, not where it has been.
And that's hard. We’ve all been in situations where we’ve sold stocks when the market was on the way up and bought when it was way down. We may have made those decisions based on longer-term trends rather than immediate data. And sometimes we may have been wrong. But that is what we need to do to succeed over time. We need to look at what happens next.
Advisors should take the same approach with their own clients. Sometimes it’s necessary to dispose of a successful stock if its performance has recently declined. It can be hard to do, but it can be the necessary and ultimately smarter decision in the long run.
Which brings us to today. What should investors consider doing? For investors with a long time horizon, this could be a chance to buy into the market considerably cheaper than they could have a couple of months ago. On a long-term basis, this is a good thing. They can just keep doing what they’ve been doing.
For investors with a shorter time horizon, it depends. Hopefully, their portfolio is built in such a way that the current decline is no big deal financially. The current decline, while sharp, is still well within historical norms, so there may well be no real need to do anything. If not, or if it is a big deal emotionally, then it is a good idea for those investors to talk with their advisors.
As a professional, I see market declines on a regular basis. As I mentioned yesterday, there are a number of headwinds hitting at once, and, because of that, the current decline is no surprise. That doesn’t make it any easier, but it does make it more understandable. Crucially, it makes it easier to plan for what happens next.
And that is what we—as advisors—do. Investors should not panic but should reach out to their advisors if they are concerned. We will get through this, together.