Investing with a nod to the past, awareness of the present, and an eye to the future

Investing with a nod to the past, awareness of the present, and an eye to the future

By Brian J. Cunningham, CFP®

The first four months of 2023 have featured headlines about market volatility, bank failures, and inflation. All this noise constantly bombards my clients, and it can provoke questions. Is their investment portfolio still balanced? Should they buy a stock that's significantly dropped in price? What about bonds? Should we consider international stocks? I weigh my answers against my client's financial objectives, risk tolerance, investment horizon, along with the past performance, current status, and future potential of their investments.   

Avoiding Investment Biases

Recency bias is a term common in many industries to describe the tendency to place too much emphasis on experiences that are freshest in one's mind, even if they aren't the most reliable or relevant. For investors, recency bias manifests when they put more weight on what's happening in the market now rather than what has historically occurred or might happen in the future. There are many other types of biases, like home bias, wherein investors may forgo international stocks because they are unfamiliar. My approach to helping clients develop and maintain their investment balance against the backdrop of history, forecasts, and economic trends inspires confidence no matter how loud or dire the financial news is on any given day.

Growth Stocks

The iShares U.S. Technology ETF (IYW) tracks the investment results of an index composed of U.S. equities in the technology sector. The last time I reviewed it, the top 25 included major companies everyone recognizes. Most are identified as growth stocks based on their performance over the past six to eight years. But not so long ago, in the first six months of 2022, they were down 30%. Flash forward to 2023, and the index is up 22%. That volatility could give an investor whiplash! 

Which companies are working on innovations to maintain their growth position into 2024 and beyond? And what about buying a growth stock when it drops steeply? Is it an anomaly, or are there tangible reasons for the falling stock prices? These are among the issues I research very carefully as I monitor the performance of my clients' portfolios.  

Value Stocks

Value stocks trade at a lower price than their intrinsic value and are typically publicly traded companies that tend to have steady, predictable business models. Without the excitement of growth stocks with their high valuations measured by price to earnings, value stocks generate modest gains in revenue and earnings over time. Top holdings in value funds generally include well-known solid companies that have been around for decades. 

Balancing Growth and Value

Portfolio diversification includes achieving a balance between growth and value stocks. Cumulatively, value stocks dominated the period between 1970 and early 2007. Midway through 2007 until COVID, growth stocks outperformed. Now value dominates again because it tends to outperform when inflation is high, economic growth is strong, and rates are elevated. Conversely, growth stocks often outperform when inflation is low, economic growth is relatively weak, and rates are low and falling. Balancing these anticipates either eventuality.

Bond Behavior

Historically bonds are a conservative investment. But last year, their return was among the lowest in history. Unlike their usual performance, bonds didn't provide portfolio protection or add to the bottom line, falling 2% when interest rates were lower. Now they act as a 10% return stabilizer, not an anchor dragging you down. What will happen next?

International Stocks

For ten years, international stocks were cheap when compared to the U.S. because many of the countries did not recover from the recession of 2007-2009 as well as we did. Although it seems stereotypical, many European companies fall short of our productivity levels. They work fewer hours, take more vacations, and have other cultural differences that negatively impact the bottom line. However, as measured by the MSCI EAFE Index, international stocks are up 12% year to date partly because the dollar is starting to fall while foreign currencies like the euro are worth more. No one knows how long this trend will last.

Quieting the Noise

The constant media hype spewing doom and gloom with financial forecasts can cause even the savviest investor to question their well-planned and balanced portfolios. In times like these, an experienced, sophisticated, and compassionate wealth manager can alleviate anxiety and stress about achieving lifelong goals by answering questions, researching opportunities, and providing financial advice based on sound economic principles. Do you have someone you can trust to guide you through the noise and honor your objectives for your financial future?  

Content in this material is for general information only and is not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.

There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification and asset allocation do not protect against market risk.