Yesterday, I received a message from a client with the following questions:
What is your present outlook? Any suggested changes in investments or allocations?
Although these questions seem fairly simple, they really get to the heart of the issues underlying investment management. The first one is the harder of the two to answer. We have clearly been through a historic period in economic history; one that few saw coming, either in scale or scope.
Now that the economy is in recovery, the question on many people's minds is, "Will the recovery last?" There are many "experts" on both sides of this question that are more than happy to share their opinions. Just google "Will the recovery last?" to see what I mean. Unfortunately, many of these opinions are based on the the efficacy of particular government actions: Has the Fed gone too far or not far enough? Will the stimulus work? Will government deficits derail the recovery? etc... Furthermore, it is easy to find two well-respected economists who disagree about each point.
The problem I have with this approach is that it doesn't account for how businesses and individuals are reacting to the current environment. I am a strong believer that innovation and hard work are the foundation of economic growth, not government policies. Examples of innovation and hard work can be seen in this article about how tinkering is making a comeback in the current economic climate.
So to answer the first question, my current outlook is cautious optimism. I am not naive, and I understand that the current recovery is fragile and that there are lots of obstacles that we need to overcome. I also understand that government actions are important, and much of what has taken place over the past year is unprecedented. We really have no idea how the story will play out over the next few months and years, and that is the cautious part. We should all be ready for more bad news and possible short-term market losses. As I say over and over, no money that anyone plans on spending in the next six years should be invested in the stock market.
The optimistic part comes from the fact that good times come when they are least expected. A few weeks ago, I posted about Warren Buffet's purchase of Burlington Railroad. When times are bad, the truly bold, smart, and energetic come forward and lead the way. Why will that be different this time? It may take a while for things to get better, but they will.
The second question, about changes to investments or allocations, is much easier to answer. I am not recommending any changes. We are strongly opposed to market timing. We firmly believe that being globally diversified is the best way to invest. Markets will continue to be volatile, even when the recovery takes hold. Trying to time that volatility is a fool's game.
Everyone's investment assets should be allocated according to their individual risk tolerance, which is what we try to do. These allocations should not be changed based on views of what may happen in the near future, because more often than not we are wrong. Here is an article which explains some the reasons why we are prone to mistakes when we make investment decisions based on our "view of the future."