The Year Ahead
In our market outlook for 2024, we emphasize two core principles underpinning our investment strategy. First, we focus on broader themes and underlying factors that are currently shaping our investment decisions. These include macroeconomic trends, policy changes, and global market dynamics, which collectively guide our approach to identifying investment opportunities and areas where extra caution is warranted. Second, a cornerstone of our philosophy is the avoidance of market timing. Data and experience have taught us that attempting to predict short-term market fluctuations is not only nearly impossible but often counterproductive. By focusing on long-term goals and risk management, we aim to build and maintain wealth through a disciplined, strategic approach. This method ensures that our clients’ portfolios are not just equipped to navigate the uncertainties of today but are also robustly positioned for the opportunities of tomorrow.
In assessing the factors currently influencing our market outlook and investment decision-making, we identify three key issues. It’s important to note that in today’s highly interconnected world, these issues often intersect and influence each other:
- Inflation, Jobs, and the Federal Reserve: Markets are significantly influenced by interest rates and Federal Reserve policy. Rate hikes to a degree not seen in forty years in 2022 and 2023, lead to steep losses in both equities and fixed income. As rate hike expectations have stabilized and with the anticipation of rate cuts in 2024, the markets are showing positive responses. These cuts will largely hinge on two factors: inflation and the job markets and these two figures will continue to hold an outside influence on both equity and fixed income values.
- AI & Innovation: Despite the pricing challenges brought on by rising rates, we foresee opportunities for the intrinsic strengths of certain firms to come to the forefront in 2024 (as we saw moving through 2023). The degree to which the excitement (or hype as it remains to be seen) is priced into current values is unclear. What we remain confident in is that new and improved technologies and innovation will continue to propel markets in 2024 and beyond and that identifying these opportunities will remain a key part of our strategy.
- Politics and Geopolitics: We cannot overlook the economic implications of global conflicts, despite their often seemingly remote nature. The resolution or escalation of these conflicts in 2024 will significantly affect the markets in our globally connected economy. At home, as we approach the November elections, and we are inundated with political ads and commentary we should remember not to inflate the impact of who controls the White House or Congress on markets. We can be confident businesses will find ways to succeed regardless of which party is in power and that the sound level of the political world is much greater than its real-world impact.
Optimism and Time Frame
In the realm of investment portfolio design, we place significant emphasis on understanding the time frame for each investment —when specific funds will be needed. This approach is crucial because market behavior is inherently unpredictable in the short term. Even the most skilled forecasters cannot consistently predict ‘Black Swan’ events that might trigger market downturns.
As we extend our view to the longer term, trends become more discernible. To illustrate, let’s consider a benchmark portfolio comprising 60% equities and 40% fixed income. An analysis of the worst performance periods since the 1930s reveals that:
• At the 1-year mark, the worst return was -17% in 2022.
• For the 5-year period, the worst return was -16.1% in 1941, with the second-worst at 8.9% in 1974.
• Over 10 years, the lowest return improved to 27.3% in 1974.
• And at the 20-year horizon, the lowest return was 98.3% in 1948.
These figures underscore several key points:
1. The Importance of Staying Invested: Navigating through volatile markets requires a steadfast commitment to a long-term investment strategy. Short-term market fluctuations should not deter us from our long-term objectives.
2. Planning for Downturns: Having a well-thought-out plan for accessing funds during market downturns is essential. This ensures that immediate financial needs are met without compromising long-term investment goals.
3. Optimism for the Future: History shows us that, in the long run, markets tend to succeed. This success is driven by human and corporate ingenuity — from the advent of the internet and smartphones to the emergence of AI, innovations continually transform our lives and economies. Despite daunting headlines, we find ways to thrive, and this enduring capacity for success is a constant we believe in.
Our approach is rooted in the conviction that, over time, markets reward patience, planning, and optimism, reflecting the progressive nature of human endeavor and economic growth.
Putting It All Together
Market downturns often serve as critical junctures for assessing risk tolerance, revealing potential mismatches between our investment strategies and actual risk capacity or comfort. Such downturns can highlight two scenarios: first, where we find ourselves needing to liquidate investments at a loss for unforeseen expenses, indicating a misalignment in our risk capacity; and second, where we choose to liquidate investments preemptively at a loss, driven by a desire to avoid potential future losses, reflecting a misalignment in our risk comfort.
It’s a hard lesson to learn, especially at the market’s bottom, that our investment strategy was more aggressive than we had intended or realized. However, with market indexes rebounding to all-time highs and interest rates offering attractive returns with comparatively lower risk, now presents an opportunity to reassess and realign our investment strategies.
As we move into 2024, I encourage you to take this chance to revisit your investments. Ask yourself: Are they still in sync with your financial needs and goals, particularly in terms of cash flow and risk tolerance? Reflect on how you felt over the past two years as you watched your account values fluctuate. This introspection is vital in ensuring that your investments not only meet your financial objectives but also align with your comfort level in facing market volatilities. Remember, a well-aligned investment strategy is key to navigating both prosperous and challenging market conditions with confidence.
https://awealthofcommonsense.com/2022/06/the-worst-years-ever-for-a-60-40-portfolio/
https://www.wsj.com/finance/investing/investing-stocks-bonds-strategy-changing-91b7589d
