By: Steven Karsh

For anyone who watches the NFL, we have seen a major shift in strategy as more teams go for it on 4th down like never before. This has to do with the ever-growing popularity of analytics. Up pops a graphic on the TV that says “go for it” when it’s 4th and 2 from the 42. Analytics are great; however, they have no way of incorporating the “human element” into the recommendation. Things such as the weather conditions at that exact moment. What has the “momentum” been over the past 5-10 minutes? Are all the starting (best) players on the field for the play? Is the game at home or on the road? How loud is the crowd noise? All these factors and many others play a part in the decision-making process, none of which can be factored into the graphic on TV that says, “go for it”.

So, what does this have to do with investing in the markets? Although we may think we know with great certainty that something is going to happen, what we don’t know is how people are going to react to the predicted situation. Experience plays a big role in long-term success. Investing is the same way, the more experience you have, typically the better the outcome. Although we have heard the caveat, past performance does not guarantee future results, knowing what has happened in the past surely helps us to plan for the future. Wars in Ukraine and Israel, high inflation, a 50/50 split in the electorate, an inverted yield curve, the explosion of Artificial Intelligence (AI), an upcoming election; events like these have all happened in the past at one time or another but how do they affect the financial markets? The answer is that it doesn’t matter as they are short-term in nature and shouldn’t affect your long-term outcome if you have a plan. That doesn’t mean you can’t make short-term adjustments to the long-term plan as opportunities present themselves, but it always comes down to calculated risks. Long-term success is often made up by short-term decisions. Below are a variety of examples of how having a long-term plan and not succumbing to short-term whims will most likely lead to more successful outcomes.

RETURN CHASERS AND MARKET TIMERS (SHORT-TERM) VS. DIVERSIFIED INVESTOR (LONG-TERM)
The Asset Class Returns chart illustrates why no matter the circumstances driving the markets, prudence calls for making a long-term plan:

1. Know your risk tolerance
2. Set realistic return goals
3. Periodically rebalance your portfolio and most importantly
4. STICK TO THE PLAN. Consistently predicting which investments will be the best from year to year or when to get out of the market and jump back in is next to impossible with any success.

ASSET CLASS RETURNS BY CALENDAR YEAR
The white “Asset Allocation” box in the graphic shows how a diversified portfolio (with an allocation to each of the asset classes) results in more consistent returns with below-average risk

RETURN CHASING DOES NOT WORK
Many investors like to pile into what has generated the strongest investment returns, expecting the trend to continue. However, the information below shows how investing in what did best has resulted in very sub-par performance compared to being diversified across many asset classes from year to year.

The table Return Comparison table compares a typical “Return Chaser,” who invested 100% of their assets each year in the asset class that did best the previous year and repeated the process annually for 15 years to the “Diversified Investor” who each year allocated assets across all nine asset classes listed in the above chart (the White Asset Allocation Box).

RETURN COMPARISON (2009-2023) ASSET CLASS RETURNS BY CALENDAR YEAR
The white “Asset Allocation” box in the graphic shows how a diversified portfolio (with an allocation to each of the asset classes) results in more consistent returns with below-average risk.
                                                                             VALUE ON                                         VALUE ON
                                                                              1/1/2009                                           12/31/2023
Diversified Investor                                         $100,000                                            $322,044
Return Chaser                                                  $100,000                                             $186,305
                                                                                                                                          $135,739
                                                                                                                                                173%

For the 15 years ending in 2023, the patient, “Diversified Investor” earned 73% more money than the Return Chaser. It is important to note the Diversified Investor rebalanced the portfolio back to the target allocation at the beginning of each year. Systematic rebalancing has been shown to result in better performance over time, so the investor isn’t underweighted to those asset classes that recover after a downturn (like equities in Q1-2020) or overweight to asset classes that have outperformed and tend to revert to long-term averages. Rebalancing also allows investors to bank gains and redeploy them into other asset classes and opportunities.

Not only do Return Chasers typically underperform, but so does the classic Market Timer—those who get in and out of the market periodically. The chart below compares starting with $10,000 and staying fully invested in the S&P 500 for 20 years (period ending December 31, 2022), versus missing the best 10, 20, 30, 40, 50 and 60 days; the difference is staggering, especially the more the best days are missed.

IMPACT OF BEING OUT OF THE MARKET

STAYING INVESTED
When markets decline it is easy to get spooked and want to pull all your money out of the market. An investor starting 2020 with a 60% stock/40% bond portfolio who pulled all their money out during the pandemic would have locked in a 19.4% loss had they liquidated their portfolio on March 23, 2020, the day the stock market hit its low for the year. The prudent investor who remained patient and stayed fully invested would have recovered all the money lost and been rewarded with 14.1% gain for the year.

The chart below separates bull and bear markets since 1942. If you remain invested and stick to your long-term plan, chances are you will be much better off than trying to time the market. Over the last 75 years, bull markets have lasted much longer than bear markets. Again, patient investors are rewarded.

POLITICS & THE MARKET
Finally, when it comes to politics and elections, there are an abundance of predictions as to how markets may react depending on which party controls the White House. As the chart below indicates, predicting how markets will perform is an exercise in futility. In the long term, there has not been a meaningful difference in stock returns based on the party in power.

CONCLUSION
Many factors have a direct impact on long-term portfolio returns, including valuations, inflation, Fed policy, interest rates, consumer spending and overall economic conditions. All these issues need to be considered, with none of them viewed in isolation. For those contemplating making frequent shifts in their portfolios, be patient, have a plan and stick to it, history shows you should be rewarded in the end.

Steve Karsh is a Senior Advisor at Ulrich Consulting Group, an SEC independent registered investment advisor. For more information you may contact Steve at stevek@ulrichcg.com or at 720-990-4983.

This article is intended for informational purposes only and nothing contained herein be construed as a recommendation. The information presented is believed to be from reliable sources, however, no liability is accepted for any inaccuracies. Past performance is no guarantee of future performance. Advisory services offered through Ulrich Investment Consultants, an investment adviser registered with the U.S. Securities and Exchange Commission.

Footnotes: (1) Large cap: S&P 500, Small cap: Russell 2000, EM Equity: MSCI EME, DM Equity: MSCI EAFE, Commodity: Bloomberg Commodity Index, High Yield: Bloomberg Barclays Global HY Index, Fixed Income: Bloomberg Barclays US Aggregate, REITs: NAREIT Equity REIT Index, Cash:Bloomberg Barclays 1-3m Treasury. The “Asset Allocation” portfolio assumes the following weights: 25% in the S&P 500, 10% in the Russell 2000, 15% in the MSCI EAFE, 5% in the MSCI EME, 25% in the Bloomberg Barclays US Aggregate, 5% in the Bloomberg Barclays 1-3m Treasury, 5% in the Bloomberg Barclays Global High Yield Index, 5% in the Bloomberg Commodity Index and 5% in the NAREIT Equity REIT Index. Balanced portfolio assumes annual rebalancing. Annualized (Ann.) return and volatility (Vol.) represents period of 12/31/04 – 12/31/19. Please see disclosure page at end for index definitions. All data represents total return for stated period. The “Asset Allocation” portfolio is for illustrative purposes only. Past performance is not indicative of future returns.