Stick to Your Long-Term Investment Strategy in Uncertain Times [Market Insight]

Steve Dixon, CFA® CSRIC®
Oct 29, 2020 4:27:48 PM

Market Insight - October 2020

I’ve been a fan of fiction books for as long as I can remember. I especially enjoy books that surprise me and are unpredictable. It happens to be the same for me when it comes to music. Some of my favorite songs have major changes in tempo or melody that aren’t necessarily expected. Unpredictability in storytelling is a gift and adds immensely to the enjoyment of the story. As actor Jack Black says in the movie Goosebumps, “every story ever told can be broken down into three parts. The beginning. The middle. And the twist.”

The same cannot be said when it comes to real life. Unpredictability or instability is often troubling. Humans are predisposed to treating uncertainty similarly to danger or risk. It is instinct to want to protect ourselves and our livelihood in the face of danger, whether perceived or real. I don’t recall a year in my lifetime that has posed so many instances of instability in the U.S., and globally, as this one. There have certainly been plenty of periods of heightened instability in memory, 9/11 and the global financial crisis come to mind. However, the word that will define 2020 for years to come may just be, unprecedented.

The Twist

There is a twist though. We have found that we can adapt quickly. We have found that the U.S. capital markets and U.S. economy can adapt quickly. Amid near-constant threat of pandemic disrupting our lives and critical racial equity concerns, we have adapted and persevered. We still face these challenges and are presented with yet another immediate test with the U.S. election less than a week away. Regardless of the outcome of the election, we will find once again that adaptability and perseverance are traits that we all share.

From an investment risk and opportunity perspective we all need to be very careful about overconfidence in the election outcome or what it means for the markets. We believe there are two things that will be true following the polls closing next Tuesday. One is that the markets will react in an unpredictable way. Yes, that’s always the case over the short-term, which is why we discourage market timing. Second, we believe that the markets will continue to be resilient.

To be clear, we are not predicting that the markets will move higher, or lower for that matter, in the coming months. We are simply stating that this year has proven again that the capital markets are dynamic and resilient. So, the basic premise we use in constructing investment portfolios, that stocks will appreciate over time, remains intact. Similarly, we also continue to believe that high-quality bonds provide the best, most consistent diversifying element in a stock portfolio despite how low interest rates are presently.

Building Portfolios with Volatility in Mind

We build investment portfolios with the expectation that market volatility will occur periodically and will vary in severity and duration. A very convincing case can be made for why the stock market should move higher in the next several months, regardless of the election outcome. Likewise, a strong case can be made for the contrary. Some investors will decide to believe one or the other case and invest accordingly. If they choose correctly, they may be rewarded handsomely. However, if they choose incorrectly, they may face a level of risk that is beyond their expectations.

I’ve written about it before, but many are living more emotionally charged lives this year. Emotions surrounding one’s economic situation, social values and uprooted routines or plans can easily influence personal perspective on near-term prospects for the capital markets. Although one’s personal situation has no influence on the capital markets it may still lead to a conviction about the future and how that may affect stock market performance. I’ve been in dozens of virtual meetings that have attempted to predict the trajectory of the stock market if President Trump or former vice president Biden win the election. Quite impressively, these predictions are generally inconsistent from meeting to meeting. Additionally, a poll taken earlier this week of financial industry professionals asked how the U.S. presidential election would affect market performance. The results were very uncompelling. 37 percent answered that it wouldn’t affect market performance, 34 percent said it would have a negative effect and 29 percent said it would have a positive effect1.

We do face heightened uncertainty. We are living in unprecedented times. There is a great deal at stake in this election. However, we do not recommend making significant changes to your long-term investment strategy in response. In constructing your investment portfolio, we have accounted for the near-term unpredictability and the long-term wealth generation capability of the capital markets in your portfolio. We have a plan for your portfolio if the markets move higher or lower in the coming weeks or months. As the story of 2020 continues to unfold, we may find more twists. We commit to you that we will continue to adapt, persevere, and remain hopeful.

Table 1

Market Indices (As Of 9/30/20) 3rd Quarter One Year
Dow Jones Industrial Average +8.2% +5.7%
NASDAQ Composite +11.2% +41.0%
S&P 500 Index +8.9% +15.2%
Bloomberg Barclays Capital Aggregate Bond Index +0.6% +7.0%
Small Cap Stock (Russell 2000 Index) +4.9% +0.4%
Non-US Stock (MSCI EAFE Index) +4.8% +0.5%


On a lighter note, I’m always trying to fill my book queue and would love to hear from you if you have any suggestions of books that you’ve read lately and particularly enjoyed. I imagine that we all may be reading more this year. If you happen to be looking for a literary distraction, I’ve really enjoyed the last two books that I’ve read. The Silent Patient, by Alex Michaelides and Where the Crawdads Sing, by Delia Owens were both well-written and certainly contained a “beginning, middle and twist”.

Be well and thank you for the trust that you’ve placed in us.

Gratefully yours,

Steve Dixon, CFA CSRICTM, Investment Manager

Kay Kramer, CFP®, Dana Brewer, CFP®, Bridget Handke, CFP®, Damian Winther, CFP® CSRICTM, Rachel Infante, CFP® CSRICTM


Source: Figures are from a live poll of attendees at the Schwab IMPACT virtual conference. Recorded on October 28, 2020.

Table 1 Source: Morningstar. Market indexes are unmanaged, and investors cannot invest directly in indexes. However, these indexes are accurate reflections of the performance of the individual asset classes shown. All returns reflect past performance and should not be considered indicative of future results.

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