I used to be really into sport biking. In case you're not familiar with it, a sport bike is a kind of motorcycle designed for speed and cornering on a paved road or closed track. I loved going fast on track, but to meet my need for speed, I had to keep my eyes up and my focus far ahead so I could see what was quickly approaching. In sport biking this is one of the cardinal rules: look where you want your bike to go; if you focus on the ground, that's where you'll end up. Ouch!
Short-term vs. staying power
While I don't miss the danger of sport biking, it did teach me to focus on what’s ahead instead of the distractions at my feet.
And that’s really important right now especially as we work to vaccinate Canadians and hopefully put the pandemic in the rearview mirror. This year, too many investors have been looking down, trying their hand at Bitcoin (or worse, Dogecoin!), various meme stocks and Non-Fungible Tokens. Lately, many investors have spent all their time worrying about near-term inflation post-COVID-19 and what it will do to markets.
None of these things have staying power – and they don't really play much of a role in a long-term portfolio. In fact, some of them have led many short-sighted investors to a major wipeout.
Shifting focus to long-term
We've all become used to dealing with a ton of uncertainty over the last year and a half – in fact, it's been downright scary. But as the pandemic tides turn, it's time to begin shifting our focus – we must reset our gaze beyond today's distractions and raise our focus further down the road. History shows this kind of thinking leads to better decision making – decision making that supports longer term financial planning goals. So, as we reset our thinking, let's keep some of these tried and true rules front and center:
While a lot of investors (ahem...speculators) have snapped up the aforementioned cryptocurrencies and meme stocks, it's important to remember that short-term bets are really hard to get right. One thing that doesn't change is diversification – a prudent portfolio has investments that span short- and long-term assets as well as currencies, countries, sectors, issuers and styles like growth and value.
Another sports analogy that is particularly relevant right now – the Montreal Canadiens. When they qualified for the Stanley Cup Playoffs, most would agree that it was pretty unlikely that they would hoist Lord Stanley’s Cup. Some might be disappointed that they didn’t go all the way. But actually, it’s incredibly good news (a surprise really) to make the Stanley Cup Finals – remember, the last time a Canadian team made the finals was in 2011.
Now, I understand that the goal in portfolio management isn’t as singular as in professional sports, but there is a lesson here: how you feel about the Habs depends on what your expectations were in the first place. At MD, our portfolio managers aren't trying to hit the lights out in order to be number one all the time – that would mean we're taking too much risk and speculating on the next hot stock. Instead, we're happy to be consistently ranked in the top third in performance with an appropriate amount of risk that leaves us with our wheels on the ground and not low siding it into a corner.
Your goals and objectives and when you want to achieve them should drive investment decisions. Therefore, the basket of investments in your portfolio should be determined by your goals, objectives and time horizon. That’s how we build portfolios at MD. With that said, don’t forget that when short-term noise arises – a properly constructed portfolio is designed to profit over time and through different market cycles.
Investing is a long-term process, an endurance race, not a sprint. Apparent success or failure in the short term is an outcome of the process but not indicative of the potential for long term success.
Capital market assumptions
When you're on a long trip, it's helpful to have a roadmap to guide you along the way. At MD, that map is our capital market assumptions which we update regularly based on the latest analysis and information. It shows where we think markets are headed over the next decade, regardless of short-term bumps. Our assumptions not only help us estimate returns, but they also show us the risks and drive our expectations for risk-adjusted returns. That helps us build resilient portfolios based on real data and thinking, not whim and sentiment.
We aren’t opposed to innovative asset classes
We are also always looking to new and innovative asset classes to help future-proof our portfolios given there are proven methods of evaluating them. Private markets are a big part of that – this includes private equity, real estate, and credit. These asset classes are hard for individual investors to access, but they’ve become essential to our long-term thinking. We know that privately managed companies can make good profits through time and aren't subject to the roller coaster ride of public markets.
Continuously riding into the horizon
We are in the process of updating our capital market assumptions, and our early estimates suggest that recent movements in markets and certain stocks are not likely to move asset class performance far-off their long-term course. We will do some fine tuning to take advantage of what may lie ahead, however there is no need for overreaction or a major overhaul. Looking ahead, things are pretty much right where we want them.
The above information should not be construed as offering specific financial, investment, foreign or domestic taxation, legal, accounting or similar professional advice nor is it intended to replace the advice of independent tax, accounting or legal professionals.