As the summer months roll on, many of us find ourselves thinking about vacations from the demands of our profession. But unlike other jobs, our careers are tied to the market – a force that's always on the move and never takes a break. Some professions can clock out, but if you're reading this, you understand markets never sleep, which requires constant attention. I am sure there are times when strategies simply run on autopilot, but the reality is that the high demands required for proper portfolio management will always remain in the back of our heads. Many of you can relate to waking up on holidays and checking the markets or the latest macroeconomic news.
Markets are always evolving and changing, and while our focus is typically on the long term, there are times when short-term opportunities arise that are simply too good to pass up. The challenge for us as portfolio managers is finding the sweet spot between sticking to our long-term goals and being flexible enough to jump on short-term opportunities. The focus of this report is how to strike that balance. The goal isn't to trade short-term just for the thrill of it but to boost the long-term value of our portfolios.
So, if the goal is to amplify the long-term value of portfolios, we must acknowledge that there are moments when the market presents opportunities that align with our long-term objectives. For example, a significant dip in a fundamentally strong stock might warrant a purchase, and depending on what happens next, that purchase could ultimately end up being short-term or long-term. Mr. Market dictates our decision-making at that point, and it will tell us what to do.
This was the case recently when we saw a pullback in US equities accompanied by a VIX spike to 65. Recognizing the potential for long-term value, we increased our allocation to the S&P 500 in our multi-asset portfolios. While we continue to favour an equal-weight approach to US exposure in our portfolio to ensure a less concentrated representation, the recent market conditions led us to make an exception to our preferred tilt. The market weight exposure felt the brunt of the pullback more severely than the equal-weighted counterpart, presenting us with an opportunity.
Whether this position ends up being a long-term hold or a short-term one depends entirely on how the market evolves. The market will determine that decision – it is too challenging to forecast with ultimate certainty. All we have to do is be prepared to adapt our strategy accordingly to ensure it continues to align with our overarching goals.
The Humility of Knowing What We Don't Know
"There are two kinds of forecasters: those who don't know, and those who don't know they don't know." – Economist John Kenneth Galbraith
I saved this quote as it is a great reminder that predicting the market is a bit like predicting the weather – you might get close, but there's no guarantee. Also, remembering to admit we don't know puts us one step ahead of our overconfident competitors who have yet to come to that realization.
Admitting that we can't see the future lets us approach the market with the right mindset. We stay open to opportunities with little to no expectations. They may remain in the portfolio for a short period or for quite some time. The trick is figuring out if a short-term opportunity aligns with our long-term goals. If it does, great – it could give our portfolio a nice boost without throwing us off our strategic game.
In our industry, confidence, if not too high, can certainly lead to competence, but adding a little humility can be a powerful advantage. Admitting that you do not know, even to yourself, can be seen as a sign of weakness, but it most certainly isn't. It's an acknowledgment of just how complex the market really is. This humility keeps us flexible, prompts us to question our assumptions, and helps us adapt our strategies when necessary.
Investors come in all shapes and sizes, and while some types are more common than others, everyone – no matter how educated – can find themselves in any of the four quadrants below. The rarest breed is the quietly successful investor who stays focused and doesn't let the noise disrupt their process. That's the sweet spot in portfolio management.
While the chart shown below might suggest investors are characterized as one or the other, you're not stuck in one quadrant; you can shift from one to another, and the results can be very fluid. Being a humble investor might not mean lacking confidence; it's more about having quiet confidence. It's understanding that when an investment pays off, it's not just because of your skill alone. We've all bought into a company's story, only to see it fail later – that's the trap of overconfidence. On the flip side, maybe you were hesitant about a decision, and not acting was the more prudent choice. The point is your confidence and the potential outcomes of your decisions are always in flux.
The fact is, by adding a dash of humility into our portfolio management process, we become flexible enough to not get in our own way. Without the pressure or the focus on whether the next trade is short-term or long-term term, we allow ourselves to make decisions based on current market conditions. This saves us from forced decisions based on some preconceived narrative. Avoid the pitfalls of anchoring and let Mr. Market be your guide.
Final Thoughts
In portfolio management, this means being ready for different market scenarios, having contingency plans, and never assuming our current strategy is foolproof. By staying cautious yet opportunistic, we can navigate the markets effectively and do our best to avoid overconfidence. As we continue our portfolio management journey, be sure to embrace the unpredictability of the markets and acknowledge what we don't know, using it as an opportunity to refine our strategies and achieve the best outcomes for your clients. Remember, while the market may never take a vacation, our approach ensures that we're always prepared, regardless of what the future holds. No rest for the wicked or portfolio managers.
— Brett Gustafson is a Portfolio Analyst at Purpose Investments
Insights with Purpose
At Purpose, we are attempting to change the status quo within the investment industry. Mainly, the enigmatic standards by which the industry operates. We are an open book when it comes to portfolio design and discussions surrounding our outlook and strategies. We want to make managing portfolios simpler for advisors and act as a sounding board for ideas. We start by running portfolio comparisons between your portfolios and ours. Not to say ours is right and what you are doing is wrong, but to understand the differences and have discussions surrounding the rationales. We aim to keep this discussion going quarterly; this is not a one-and-done service. We want to build our relationships with advisors so that the end client has a satisfactory investment experience.
If you want to know what exposures your portfolio is tilted toward, feel free to reach out to our team. As the great Peter Lynch once said, “Know what you own and why you own it."
Sources: Charts are sourced to Bloomberg L.P.
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