Geopolitical risks abound: China/Hong Kong, China/Taiwan, Saudi Arabia/Iran, Iran’s nuclear capability etc. Layered on to these risks is the unprecedented challenge Central Banks face to successfully navigate a post-pandemic world. What should investors do?
While these headlines are virtually impossible to ignore, investors nevertheless should focus on the things they can control. They cannot control geopolitical events; they cannot control exogenous risks (natural disasters, wars, etc.); they cannot control the stock market or the direction of interest rates. Judging or abetted by the business TV shows (CNBC, Bloomberg, etc.), investors seem obsessed with the near-term direction of the markets, over which they have no control.
What can investors control? First and foremost, they can construct the appropriate asset allocation (often with the help of a trusted advisor) which takes into consideration their objectives, needs, and risk tolerance. Proper asset allocation increases the odds of remaining invested for the long term.
But investment success is more likely achieved by the length of time invested in the market rather than by market timing. An investor with a suitable asset allocation is more likely to stay invested throughout market cycles.
Beyond asset allocation, investors can control their investment selections. For example, with respect to equities, investors control whether to invest domestic or international stocks: large versus small, value versus growth, dividend payers versus non-yielders, speculative versus quality. These decisions can be implemented with individual securities, mutual funds, ETFs or money managers. The same is true for fixed income choices. It should go without saying, though, that just because someone has a choice in what to buy, that does not mean it will go up in price.
While investors cannot completely avoid fees and taxes, they can certainly make choices that help mitigate those return-destroyers. This doesn’t mean low-cost products are always the best way to invest. Sometimes you pay for what you receive. But we believe there is little reason to choose a high-cost active manager who is essentially a closet-indexer, when one can purchase a low-cost index fund or ETF. Investors with taxable assets should pay attention to the after-tax return on their investments. Excessive or unnecessary turnover (particularly short-term trading) which leads to large capital gains taxes depletes wealth.
The bottom line is that while it is unrealistic to ignore global and domestic events and the direction of the market, investors are better off paying more attention to the things they actually can control. Proper asset allocation, appropriate investments, lower fees and reduced taxes are some of those things. And more time spent paying attention to those factors is what will benefit investors.
