When we mix a delicious Greek gyro with an excellent German lager, we get an average combination that doesn’t do justice to the epic individual components. In any case, we survive, with a moderately satisfying meal. Greece’s PM, Alexis Tspiras – voted in recently by his country with a mandate of removing austerity – has been making some headway with his European counterparts in renegotiating the country’s debt details. We project a compromised deal will be reached between the parties involved in the coming weeks, leading to short term stability and a continued bullish European market sentiment. But even if it doesn’t, we need to be prepared – and in the meantime, will projected US interest rate hikes, global currency wars and geopolitical issues all calm down and lead to glorious results that make life simple? It’s unlikely. The world’s complexity and intertwined nature needs to be factored in to your investment decisions. We, or likely you, don’t have the ability to alter Tspiras’s and Angela Merkel’s mindsets – unless you’re on their board of advisers, or hanging out with them on the weekends. So, all we can do is adapt to the hand we’re dealt – and take a strategic approach.
According to John Bogle, the indexing pioneer and founder of Vanguard, asset allocation (meaning, dividing your investment between equities, bonds, real estate, commodities, etc) is the primary driver for over 94% of your investment return variation. Security selection and market timing comprise the other 6% in terms of return contribution. So essentially, regarding stocks, Bogle’s point is to stay invested in the broad market rather than risk choosing and losing. And while we keep seeing the stars of the latter two methods in the media, remember – they’re only a few percent of the population. And, within this few percent, they may be activists – handling big funds that influence management teams and actually alter future cash flows, rather than just project the same flows the market is factoring in (leading to today’s stock price). It’s unlikely that you have the horsepower to do this type of stuff (can you picture yourself picking up the phone and calling Google’s CFO, asking for a dividend?). So, with this background, here’s an approach to consider for your investments.
– Think about investing your hard earned cash through a combination of passive ETFs (such as a combination of SPY and VXUS) for the long term, and disengage yourself from single stock risk, short term volatility or downturns. Over the past 80 years, stocks have doubled your money every 10 years, approximately. Why miss out on future gains, assuming the world continues to progress? It’s a great place to store your money and relax with a long term horizon.
– After this, if you have some free time and want to play around with the remaining few percent, look into certain sector and region ETFs if you think you’re seeing something the market isn’t – or believe the world will move in a certain direction with time (remember – this is a slight deviation from Bogle’s methodology – but we think it’s worth it to an extent). We recommend the technology field, biotechnology, financials and global infrastructure, among others, for 2-3 year time horizons/tactical plays. Also look at countries and regions to invest in – check out our Trends for 2015, Germany, and India columns below for ideas. Funds remove single stock risk, so if you think you are onto something macro-driven, we recommend going with the broad ETFs.
– Play around with single companies only if you have the time to research, and think you see something in the future that the market is ignoring – or believe that human sentiment plays a role in mispricing stocks. Sometimes, we agree that markets overreact. Remember JP Morgan falling over 24% in the month the news of the London desk trade-gone-bad flashed on CNBC? We don’t think that drop was warranted given the company’s performance otherwise. High frequency trading, meanwhile, is responsible for nearly half of the US equity volumes these days, and short term news or unvetted reports can cause electronic trading to go haywire, again, leading to overreactions and opportunities. However, we wouldn’t count on this strategy as a sustainable one. If you want to look into single companies, we advocate doing serious research in terms of their products, management team and financial statements before going for it. We sincerely appreciated Tim Cook’s comment at the Goldman Sachs Technology Conference last week, where he said Apple doesn’t focus on the ‘numbers’, but rather, on what ‘creates the numbers’. Such are the firms we like to invest in – the ones that lead the drive for innovation in achieving a smarter, better world through their vision and products. Check out our Performance and Outlook page for some ideas, and meanwhile, stay invested with the financial markets and in sync with the details.
