Broker Check


September 10, 2019

Benjamin Franklin is credited with saying, “If you fail to plan, you are planning to fail.” We take these words to heart, and they are a core reason why we spend a great deal of time helping our clients develop and implement a financial plan. Yet lately we’ve been getting a few questions about what happens if our plan fails. While there are several reasons why a plan could fail, the current questions come from clients concerned about our investment strategy failing.

We certainly agree that our investment approach hasn’t met our return expectations as of late, but we don’t agree that it has failed. In fact, we believe it is doing exactly what it should be doing. So, we thought it would be beneficial to review the areas of our investment approach generating the most questions: global diversification and small value company investing.

We like to globally diversify our portfolios for various reasons, including these: First, we believe great companies may be found anywhere, not just in a single country. Second, including multiple countries in our portfolio reduces the risk of a recession in one country adversely impacting the stocks of other countries. Investing in multiple countries means our returns are influenced by multiple economic cycles.

While it is true that the U.S. stock market has been one of the better economies this decade, we don’t have to look too far back to see that hasn’t always been the case. The first decade of the new millennium was called “The Lost Decade” because the U.S. stock market returned essentially zero percent in the 2000s. Investing in non-U.S. stocks was very beneficial in that period.

The second area where our return expectations have not recently been met is in our preference for small value companies (i.e., small market-capitalization companies with higher book values versus their market price). We believe small value companies are riskier than large growth companies, and because of that risk, they offer higher expected returns versus companies that are larger and growthier.

Historical evidence and economic theory surely back up this preference. The historical evidence also shows us that the outperformance benefits of small value investing don’t always appear over the short term. Because part of the risk with this strategy is that there is no guarantee we will “win” every time, staying invested for the long term helps mitigate the risk.

We could go on about the merits of our investment approach, but the best way to conclude this thought is to think about the alternative. If we didn’t invest the way we do, we’d likely try to time the market (i.e., purchase and sell stocks at the “right” time). The challenge with that approach is that the advisor must guess which country or stock is going to do well and get it right consistently. We think an evidence-based investment approach like ours is superior to one based on hunches and guesses.

Long-term investing neither assures a profit nor guarantees against loss in a declining market. Past performance does not guarantee future results. Stock investing involves risks, including increased volatility (up and down movement in the value of your assets). All investing involves risk, principal loss is possible.