Building on last month's post, I want to explore a few related ideas as they pertain to wealth management and our approach to the management of your investments. Recently, I heard a radio segment where the host asked a financial expert how she was adjusting client portfolios in response to rising tensions between the US and its key trade partners. While the expert’s answer did not get my wheels turning, the host’s question did. To me, it implied that a client's portfolio needed to be changed because of international tensions, suggesting that active management means reactive management. In my view, this shows a misunderstanding of what professional wealth management should truly be about.

This has prompted me to think: How common is this illusion of control? When a global crisis or major market event is looming, do people believe that making small changes to a portfolio will have a meaningful impact? More importantly, if your advisor did not foresee the crisis, what makes you think he or she can predict its outcome—and adjust your portfolio for better short-term results?

There is no simple formula that says, “If X happens, do Y.” The reality is much more complicated. There are too many factors at play, and too many potential outcomes, to have any real confidence that short-term trading decisions will lead to better results. National economies, global trade, and market dynamics are far too complex to be reduced to soundbites on the radio.

In physics, there is a closed-form solution for predicting the motion of two objects based on Newton’s laws. However, as soon as you add a third object, the problem becomes unsolvable. Now, think about how many “objects” are involved in global investment markets. At every point in your investment journey, you should assume that your advisor does not know what will happen next. Most market events are called “surprises” for a reason.

I have also noticed that pessimistic people often come across as very smart—and, as a result, very believable. For analytical investors, there is something seductive about listening to a well-spoken commentator dissect endless data points supporting a negative viewpoint. On the other hand, a positive perspective can easily be dismissed as wishful thinking or naïve optimism.  For example, there will usually be more market commentors talking about why prices are too high than why they can move higher.  That is, it is often easier to spot what is wrong than to imagine what might be right.

To be clear, I do not think pessimism is helpful when it comes to one's long-term investment objectives —especially when you consider the market's track record. Over time, markets have proven resilient. It is often said that pessimists sound smart, but optimists make money.  Keep this in mind. 

While it is important to be prepared for pullbacks in our model portfolio —whether they are 10%, 15%, or even 20%—it is crucial not to fall into the trap of assuming the worst. Convincing yourself that markets can be understood in a five-minute news segment on a random Thursday morning and then reacting to those same sound bites is likely not in your best interest as a long-term investor.  I would suggest an exaggerated eye roll instead of any knee-jerk-fear-response that may otherwise be triggered during such times.

Market volatility is inevitable, but consistently buying into doomsday narratives will only distract you from what matters most: staying focused on your long-term goals. For your short-term financial needs, we continue to encourage our clients to set aside money in a risk-off portfolio.  As your Investment Advisor, I encourage you to stay patient and remember that short-term fluctuations do not define long-term success.  If you would like to review your financial position or get a second opinion on your investment allocation, please reach out.  We are always happy to connect.