In many ways, year-end is as arbitrary a date as any other. But because we are fond of patterns (and parties) it seems as good a time as any to reflect on 2015, ring in the year ahead, and reiterate why our recommended investment philosophy remains the same as ever.
Our philosophy is evidenced-based, with good reason. In capital markets where there are no sure outcomes, following the most time-tested analyses that have undergone the most rigorous levels of global peer review is as close as we can get to stacking the proverbial deck in our favour.
What does that evidence tell us about investing? Given the pragmatic and behavioral challenges involved, we remain best served by three guidelines:
1. Establish a well-defined investment philosophy
As Dimensional Fund Advisors’ David Booth has often said: “The most important thing about an investment philosophy is that you have one.” Since we don’t have a crystal ball to foretell the future (nor does anyone else for that matter), we believe that our durable evidence-based philosophy continues to be our best guide in ever-volatile markets.
2. Stick with your well-defined investment philosophy
It helps to have an evidence-based philosophy. But we must also recognize that the markets routinely challenge our resolve with frequent and often lengthy mixed signals.
Take, for example, the recent stretch of underperforming “value stocks.” The evidence informs us that, over time, investors can expect to earn higher returns by tilting their portfolios toward lower-priced value versus higher-priced growth stocks. In reality, it’s been a while since we’ve seen that expectation bear fruit.
But before we alter our course, consider this: Through year-end 2014 across overlapping 15-year rolling periods dating back to 1928, the U.S. value premium has outperformed growth … 100% of the time, even though there were plenty of multi-year periods like this one when it did not.
3. Have processes and safeguards in place to reinforce your resolve
So, yes, we remain confident that this sort of durable evidence continues to be our best guide in noisy markets. That said, even the most disciplined investor should reinforce strategies with processes for managing the very real market risks involved.
For example, the evidence is strong that we can continue to expect higher long-term returns from value versus growth investing. But the evidence is equally strong that there’s no telling when – or even if – those higher returns will be delivered. This is one reason we don’t recommend over-concentrating your investments in any one factor.
Instead, our process is to build a globally diversified portfolio that reflects our client’s risk and return requirements. It also includes providing ongoing advice and repetitive reminders, just like our message today, to help you see your way through to your individual goals.
We wish you continued investment resolve throughout 2016. This year, next year, and in the years after that.