According to Stewart Alsop’s 1973 memoirs of a conversation with Winston Churchill, the British prime minister contemplated towards the end of World War II: “America, it is a great and strong country, like a workhorse pulling the rest of the world out of despond and despair. But will it stay the course?”
We ask the same question today of investors, after what has been an emotive period for financial markets. From trade wars to Brexit, North Korean tensions to Italian political turmoil, we’ve had plenty of noise to deal with. So, what do we mean by “staying the course”? It is not always about sitting still (even though this is often the easiest path to investing success), but rather, to focus on the goal that you set in the first place and ensure your behaviour aligns with it.
Let’s face it, investors too often redirect their focus from the destination to the journey. Much like in other walks of life, we can lose focus, making us susceptible to capitulation or giving up at the exact moments when we require fortitude and resolve. That is, investors are hard-wired to be procyclical, chasing the winners and selling out of the losers because of a yearning to make money work harder for us. This is not just conceptual, we can see it directly in the fund flow numbers.
Therefore, it is vital that as investors we remain vigilantly aware of how animal spirits can drive irrational decision-making, and that we adopt a reasoned framework for investing. Behavioural errors can wreak havoc on long-term portfolio returns due to excessive and unjustified turnover.
A Step-by-Step Guide to Staying the Course
The best thing an investor can do when contemplating change is to reflect on their goals. Would the investment change align with the original investment plan or strategy for reaching well-defined goals? The key question to ask is whether anything has fundamentally changed since setting the original strategy or whether it’s just that the client is disappointed with the progress towards goals.
If something has fundamentally changed, the next question to ask is whether you can clearly identify what has changed. Write it down, then balance this by writing what it might mean if you’re wrong. This should include any misjudgment risk as well as the added costs if you decided to change investments. You will often find that the change you desire is not necessarily going to increase the probability of reaching your goal/s.
If it has “just” disappointed you, but nothing has fundamentally changed, the likely best option is to stay the course. By thinking probabilistically and remembering that investment markets never move in straight lines, you may avoid the perils of trying to time the market. Furthermore, you may benefit by doing the opposite to your intuition (given the evidence against it) and teach yourself to be a contrarian.
What We Think about Staying the Course
As professional, multi-asset investors, we focus on the investment objective, always bearing in mind the opportunity costs and risks. We also write down a balanced thesis that ensures we remove any emotion from our decision-making.
In this sense, staying the course is not idle or passive, but rather about staying aware. Some investors may look at a recent period of lean returns and, with a hindsight bias and the herd mentality at play, will fear for the future. Many will further justify to themselves that reward for risk is simply not sufficient and will consider a change in strategy. This thinking is usually well intentioned, but it is dangerous and must be thought through with a long-term perspective.
Staying the Course vs. Timing the Market
Investing, like many things, often involves taking the thorns with the roses. Over dozens of years and through all investment literature there is one golden thread–the evidence clearly favours time in the market over timing the market. This can be illustrated in various ways, but one of the most compelling is to simply reflect on the cost of missing the best days in the market.
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