The Benefits of Taking the Long View

Posted by Brad McMillan, CFA, CAIA, MAI

This entry was posted on Jul 31, 2014 3:05:43 PM

and tagged Commentary

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taking the long viewI'll be out of the office for a few days, so I'm revisiting some of my past posts. (Today's originally appeared last July.) 

Last night, I took my wife out to No. 9 Park—a very nice restaurant in Boston—to celebrate our 10th anniversary. Among other things, we talked about where we were 10 years ago, and how much has changed.

As we spoke, it occurred to me that we rarely have this type of conversation—one that covers longer periods of time rather than just what's happening right now. When you look back over a decade, events that once seemed so important may become less so, while things that seemed insignificant may turn out to be major.

What's your time frame?

Part of success in life—and in investing—is developing an appropriate perspective on things. When people ask me what I think will happen with the economy or markets, or what I think investment returns will be, my initial response is always the same: “What's your time frame?”

The time frame you're operating in should guide your decisions and, in many cases, will determine how effective those decisions will be.

In conversations with advisors recently, one topic that keeps coming up is how many clients are unhappy with the performance of their portfolios this year. The dissatisfaction isn't because they're not doing well—they are—but because their portfolios are underperforming the S&P 500 this year. What a great example of short-term thinking! Because stocks are up over the past year and more, we should be in the stock market—and we conveniently forget about the downside risk.

Short-term thinking isn't limited to clients, of course. Those who excoriate Ben Bernanke today seem to forget that, five years ago, he was one of the people who helped save the economy. We can argue about the appropriate policies now, but at the time, he held the line. Investment managers who claim stocks are cheap are looking only at recent markets. And there are many other examples.

One of the reasons I prefer the cyclically adjusted P/E ratio as a valuation metric for stocks is precisely because it isn't timely—that it does pull in information from a decade ago. To insist on using the most current data alone is to assume that things are so different now that old information is irrelevant.

As we have found over and over, this time is not different. Think about it:

  • Right now, we are recovering from the Great Recession, and the Fed’s low interest rate and stimulus policies are very controversial.
  • Ten years ago, in 2003, we were recovering from a deep economic slump—the dot-com boom and bust. The Fed was supporting the economy with low interest rates, and employment was slowly recovering.
  • Ten years before that, in 1993, we were recovering from the real estate depression of the late 1980s and early 1990s, and the Fed was supporting the economy.
  • Ten years before that, we were recovering from a terrible Fed-induced recession.

Does any of this ring a bell?

So, where will we be in another 10 years?

Well, I'll take a guess and say that we will be recovering from a recession, after a period of substantial growth. And, once again, the Fed will be taking controversial policy actions, just like it has over the previous 30 years.

One of the advantages of getting older—and there are many—is developing a sense of perspective. Ten years on, my life and my marriage are richer. So, too, is my understanding of how the economy works. As part of considering where we are now, it's important to take a look at where we have been, over a period of decades.

The economy continues on the difficult road to recovery, but our current situation isn't all that different from where we've been in the past. We got through those challenges, and we will get through the current ones.

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