Tom Bradley is president of Steadyhand Investment Funds Inc.
I see it all the time – people unwilling to invest in stocks because of the debt situation in the United States, Europe, China or Canada, the economy’s dependence on central bank stimulation or China’s slowdown.
Their hesitation may pay off one day, but I think investors who base their portfolio strategy and investing intentions on a handful of macro-economic factors have to take a long, hard look in the mirror and think about changing their approach.
In my view, the economic “issue of the day” plays far too big a role in investors’ decisions and negatively affects returns. While the concerns mentioned above have been topical over the last two years, global stock markets have appreciated 50 per cent.
Investing is too complex and multi-dimensional for us to get entrenched on a single economic or market theme. Let me explain.
First, no matter how certain you are, you’re going to be wrong a lot. As Yogi Berra said, “It’s tough to make predictions, especially about the future.” Indeed, you don’t need to go back very far to see how easy it is to get a big call wrong. Just three years ago, there was strong consensus around China’s growth, gold’s pre-eminence and the decline of the American empire. All proved to be overstated, or at least inconveniently premature.
Second, the interesting, sometimes alarming, issues that investors and the media lock in on rarely turn out to be as important in influencing securities’ prices as the ink and volume would imply. Recent budget negotiations in Washington were a great example of this divergence between attention and impact. I don’t know of another macro event that weighed on individual investors more (and delayed investments), and yet had less of an impact on market values.
And finally, even if you identify the important issues, and get the call right, you still have to predict how the market will react. If few others have your insight, then you’ve discovered a genuine money-making opportunity. If, on the other hand, many market players are expecting the same thing, it will be a non-event. Valuation, the linkage between fundamentals and prices, and the closest thing we have in investing to the law of gravity, is rarely included in macro-economic discussions.
I’m not saying that we can’t enhance returns by reading the economic tea leaves. But most investors aren’t attuned enough to the markets to act on their macro views.
Most investors should religiously stick to their strategic asset mix. For those who do want their portfolio to reflect their big picture biases, it’s worth thinking about how to do it. Your bets should be made in the context of your overall portfolio.
For instance, if your target for stocks is 50 per cent to 70 per cent of assets and you’re feeling bullish, you’ll want to make sure you’re in the upper end of the range. Not 100 per cent, but mid to high 60s. Vice versa, if you’re worried about stocks to the point of not sleeping, then the low 50s makes sense. Not zero.
In other words, put limits on how far you take your view. You don’t want it to cripple your portfolio if the world doesn’t unfold the way you expected. A constrained approach also leaves room to go further at a later date. If the strategy goes against you initially, you’ll be able to add to the position at better prices.
We all love to talk macro. It’s fun and interesting. But as investors, we have to be realistic about how our views impact our investment returns. Acting on a strong opinion without considering the myriad of other factors, including valuation and the structure of your overall portfolio, is a tough way to build wealth.