Atlantic Capital Management

Atlantic Capital Management (143)

Wednesday, 05 March 2014 00:00

Want Investment Success? Stay Invested

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As we’ve discussed in previous articles, there is no shortage of investment advice for maximizing portfolio returns using techniques that range from “cutting-edge” to “downright crazy.” Timing the market, chasing high yields, speculating in precious metals…all of these strategies are utilized on a daily basis by DIYers (Do It Yourselfers) and professionals alike in an effort to “beat the markets.” At Atlantic Capital Management, we don’t chase returns with faddish techniques. We advocate a much different solution for our clients and DIYers; think of it as a “base hit” approach vs. a “home run” approach.

Diversify…and stay invested.

It’s that simple. If financial security is your long term goal, stick with an approach that leads to success over the long-run. The foundational principle of this strategy is leaving your money where it is and riding out the inevitable market downturns. This doesn’t mean ignoring reality; it means you (or your investment advisor) should start with the end in mind and make changes to your portfolio that are driven by your long-term goals. The underpinnings of this approach are simple: allocate assets across markets for breadth and within market sectors for depth. This focus on diversification will instill confidence rather than lead to the impulse to “bail out” when things look bleak.

And it’s inevitable that things will look bleak. For example, consider the global financial crisis of 2008. Many people ran for the hills when the markets hit bottom in 2009, either dumping or converting their investments on a large scale. It’s hard to fault this reaction; after all, if it were possible to accurately predict a market’s bottom, most people would be doing it!

Some investors, however, stuck to their long-term focus knowing that their portfolios reflected their need for liquidity, their personal tolerance for risk, and an appropriate time horizon. Investors who structured resilient, diversified portfolios hung on to their positions. The results of this strategy are telling, and fundamental to why we advocate staying invested. According to data from Morningstar, $100,000 invested in the stock market in January 2007 (the beginning of the slide) was worth only $54,000 in February 2009 (the bottom point). Investors who pulled out at the bottom obviously suffered significant declines. More importantly, those who pulled out at the trough and let things cool off for a year and then reinvested ALSO saw a net loss on their investment. Only those investors who stayed invested and rode out the storm with a long term goal in mind saw the value of their investments grow. For those investors, that $100,000 was worth $143,000 at the end of 2013.

As predicted by many market-watchers, the Federal Open Market Committee announced on January 29 that it would continue to cut its monthly bond purchases. Citing the continued moderate expansion of the U.S. economy, Fed Chairman Ben Bernanke moved to trim the bond-buying program (known commonly as “quantitative easing” or “the Fed taper”) from $75 billion per month to $65 billion. Bernanke additionally announced that the Fed’s policy of supporting near-zero short-term interest rates would continue indefinitely. Short-term interest rates, which govern the rates at which financial institutions borrow from one another, have a cumulative effect on all loans; in deciding to keep the federal funds rate target rate between 0% and 0.25%, the Fed reiterated its focus on stimulating the economy through availability of capital.

Several things came to mind as I read through the announcement:

  • What does this mean for investors? Despite a little bit of turmoil in the markets during the run-up to and in the wake of the announcement, this round of quantitative easing will have very little impact on investors who are well-diversified and in it for the long haul. Asset allocation for breadth and depth, across markets and sectors, is still the “status quo” strategy for our portfolios.
  • The Fed remains bullish about U.S. recovery. It’s hard not to see the continued expansion of the taper as a vote of confidence for the overall recovery of the U.S. economy. Chairman Bernanke specifically reiterated the Fed’s forecasts for 3% growth in 2014 and 2015 during the announcement. Low interest rates are good for the economy and for investors. And the Fed’s continued assertion that it will keep those interest rates low “well past” the point where the unemployment rate reaches 6.5% builds in some favorable long-term perspective.
  • Emerging markets are in for more volatility. The algorithm here is simple: as investors look to the U.S. as the first-world economy with the most upside potential, the flow of capital out of emerging markets and into the resurgent domestic economy may accelerate.  This may retard emerging market recovery.  At best, it will do little to quell the correction that has been bleeding emerging market investors since the spring.

At ACM, we’re inclined to follow the Fed’s lead and “stay the course” with our traditional focus on breadth and depth across markets. We’ll certainly be paying attention to the next rounds of tapering as they take place, but for right now, we’re taking it in stride.

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