A good game plan, discipline and consistency. These are needed for a winning football team as well as a successful investment experience.
A strong football team is usually led by an outstanding coach, who has developed a set of guiding principles that are followed by his players.
When I was doing the research that led to the formation of our investment firm, I wanted to have a consistent investment philosophy that would guide us for the long term. I didn’t want to rely on fads, trends or crystal balls.
Burton Malkiel was one of the guiding forces in influencing our investment philosophy. He wrote the investment classic A Random Walk Down Wall Street in 1973. The 11th edition will soon be published. What Malkiel wrote over 40 years ago still holds true today. His beliefs have stood the test of time.
When Malkiel talks or writes, people listen (or should listen). Malkiel wrote an Op-Ed in the Wall Street Journal that was published last Thursday, titled “Are Stock Prices Headed for a Fall?” He provided insights and recommendations which are very consistent with the advice we provide to our clients.
Malkiel did not directly answer whether stock prices are heading for a fall. He said that with persistent low interest rates and an environment for slow but steady growth, stock prices should continue to grow over time. We agree with this. His main message was that you should not expect, assume or plan for annual double-digit investment returns. He stressed the importance of savings and realistic return assumptions.
“Second, don’t think you can time the market and sell your stocks now, hoping to get back in later after there is a correction. No one can consistently time the market, and you are more likely to get it wrong than get it right.” Perfectly said!
His next advice: “Stay broadly diversified with a portfolio that is consistent with your age, financial obligations and risk tolerance…All equity portfolios should include emerging markets.”
We have always believed in globally diversified portfolios. We think 30-40% of your stock portfolio should be invested outside the US, for diversification and performance benefits. While emerging markets are quite volatile, we agree with Malkiel’s assertions. Although emerging markets lagged the US markets in 2013, they have outperformed them in 2014. We believe a consistent allocation to emerging markets is an important component of a strong investment portfolio.
Malkiel stated that emerging markets are growing rapidly and represent a significant portion of the world’s economic activity. Malkiel is not making predictions about what will occur in the near term. He is advocating sticking with a globally diversified portfolio for the long-term, which should include an allocation to emerging markets.
Does your portfolio include an allocation to emerging markets?
Are you properly diversified on a global basis?
Do you have a consistent and disciplined investment game plan?
We do. And so should you.