Reap What You Sow

By SJS Senior Client Portfolio Manager Tom Kelly, CFA

Sometimes, things don’t happen as you might expect. The first quarter of 2019 will be remembered for bringing us the longest government shutdown in U.S. history, continued trade wars with China, lowered consumer confidence – and U.S. investment markets that were up more than 13 percent, as shown in the graph below.[1]

The year started out with a bang rivaling the fireworks displays of New Year’s Eve, as U.S. stocks posted their best January in 30 years – all of this coming on the tail of the bear market at the end of 2018.[2]

While there may have been temptation to act to protect against further losses, this more often than not leads to loss and regret. Prudent investors who stayed the course would have been rewarded for their discipline.

The first three months of 2019 have been a budding reminder that the markets efficiently price in information before we even know or hear about it. Market timing is a fool’s errand.

In fact, Nobel laureate William Sharpe – who created the Sharpe Ratio return/risk metric, which is used to help investors understand the return of an investment compared to its risk – determined that someone who tries to time the markets must be right 74 percent of the time in order to outperform a buy-and-hold approach on a risk-adjusted basis.[3],[4] The cost of being wrong gets exacerbated during periods of volatility, just as the desire to tweak and tinker increases.

Instead of market timing, MarketPlus Investing® is based in part on the idea that diversification may be a smarter way to increase expected return for a given level of risk. Adding diversification should increase the Sharpe Ratio, which helps demonstrate that excess returns above the “risk-free rate” (the return of a U.S. Treasury bill) are the result of good investment decisions instead of increased risk taking.[3]

Investment droughts will arise, so instead of trying to predict when and where the ‘rain’ might come, we recommend that you preemptively plant your assets in rich soil – a MarketPlus portfolio designed with comprehensive market coverage, calculated risk exposure, and cost-efficient implementation.

As spring approaches, the new green shoots popping up everywhere serve as a great reminder of the growth that follows the strain of a harsh winter. Just as the work is done far before you see the fruits of your labor, our science-based process of structuring and designing portfolios to help you achieve your financial goals has weathered the test of time, through seasons both good and bad.

So, go out and enjoy working in your garden, cultivating relationships, or rooting yourself in a new hobby this spring. You can be sure we’ll be following the same nurturing approach with your portfolio by maintaining the discipline of our MarketPlus Investing philosophy.

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Sources:

[1] S&P 500, 2019 YTD Performance as of 3/31/2019. Morningstar.
[2] Amrith Ramkumar, “Stocks Post Best January in 30 Years.” Wall Street Journal, 2/1/2019.
[3] Marshall Hargrave, “Sharpe Ratio Definition.” Investopedia.com, 3/9/2019.
[4] William Sharpe, “Likely Gains from Market Timing.” Financial Analysts Journal, vol. 31/no. 2, 1975.

Important Disclosure Information:

Past performance is no guarantee of future results. Indices are not available for direct investment; therefore, their performance does not reflect the expenses associated with the management of an actual portfolio. Diversification does not assure a profit or protect against loss.

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