Personal Wealth Management / Market Insights
Becoming an Effective Long-Term Investor – Nov. 2022
In this episode, host Naj Srinivas shares a recent session for Fisher Investments clients, now available to everyone. It features Mike Hanson, Senior Vice President of Research at Fisher Investments and a member of the firm’s Investment Policy Committee. Mike discusses building the right investment portfolio to meet your needs and finding the proper benchmark to gauge your performance. He also examines the importance of staying disciplined when market turbulence appears.
Want to dig deeper?
Trying to time the market can be a mistake that retirement investors often make. Read “Avoid These Common Retirement Investing Mistakes” to learn more about the pitfalls of market timing and other behaviors that could set you back from your long-term investing goals.
Bear markets can be scary, but they shouldn’t prevent you from reaching your long-term investing goals. Watch Ken Fisher, founder of Fisher Investments, debunk the idea that one big bear market spells disaster for your retirement.
Judging your investing progress can be easier with the right benchmark. In “Ken Fisher on the Importance of Having a Benchmark,” Fisher Investments’ founder explains how the appropriate market benchmark can help you track your progress to your long-term investment goals.
Have questions about capital markets, investing or personal finance? Email us at email@example.com and we may use them in an upcoming episode.
Full Episode Transcript
Hello and welcome to the Fisher Investments Market Insights podcast, where we discuss our firm's latest thinking on global capital markets and current events.
I’m Naj Srinivas, Senior Vice President of Corporate Communications here at the firm.
Today, we'll be covering an important topic for these turbulent markets: becoming an effective long-term investor. At Fisher Investments, we believe that achieving your long-term investment goals starts with having a solid plan…and sticking to that plan over time.
However, we’re all human, and when markets get volatile, even the most steely-eyed investor can question their decisions. So, in this episode, we’ll look at some ideas and strategies that might help you on your own investing journey.
To guide us through this important topic, we’ll listen to Mike Hanson, Senior Vice President of Research and a member of our Investment Policy Committee. This recording comes from a recent presentation that Mike gave for clients of Fisher Investments. While the presentation was originally just for clients, the information Mike covers, though, is really applicable for most long-term investors.
He’ll look at building the right portfolio to meet your needs, finding the proper benchmark, and how to judge your performance over time. He’ll also examine what it means to stay disciplined and why that’s one of the most important behaviors to be a successful long-term investor.
However, before we listen to Mike, I'd like to ask you to rate and recommend our podcast wherever you listen to it. In just a few minutes, you can help make this information available to even more people.
Thanks so much for your help. With that, let's learn more about what it takes to be an effective long-term investor.
So I've got a list of questions here in front of me. And the first one is how do you become a successful long-term investor? And in fact, if you see a bear market, how do you navigate that? And does it take you off your path?
Well, the first answer is a bear market by itself does not take you off your long-term financial goals. And Fisher Investments has a very specific process for doing that. It's really two parts. It's the plan we create for you. And then it's the discipline of the investments themselves. So first let's talk about the plan.
When you became a client of Fisher Investments, what we would've done was gone over your entire history, where you think you're going and all the relevant details. We talk all of that through with you to create a roadmap or a plan for your wealth going forward. We ask you about things like your risk tolerance. We ask you about things like what are your long-term goals and what's the real need for this money?
That's imperative to how we invest for you, because when we create a plan for you, we are so conservative that in fact, we assume that we will never ever call a bear market correctly for you.
Let me just say that again differently. When we create a roadmap for you, for your success to get where you need to be over the long haul for your investments, we assume that we'll never make a bear market call correctly for you. And even in spite of that, you'll still have the highest likelihood that we are able to manage to get you to those goals.
So we want to stay very disciplined towards that plan. All sorts of things happen in the short term, but the thing that can really jettison your ability to get where you need to be is by getting off the plan. And especially when things seem nervous or a little bit different than they have been is suddenly veering away.
So that's part one, stay with your plan. It's designed to get you to your long-term goals, even in times when our forecast isn't right. The second piece is just how we manage portfolios. We are always thinking about your long-term goals in mind. And as a result of that, we have what I call, or what we've called for many years, four basic rules of portfolio management.
The first one is to select an appropriate benchmark. That's imperative because the benchmark really is the roadmap for your investing future. We select for the vast majority of our clients, the Morgan Stanley Capital International World Index—the MSCI World, which is developed stocks of the world. It gives you big, broad diversification, access to all the really big companies of the world across the globe and across sectors. That diversification is very important. Once we've made that selection for you, then we analyze the components of that benchmark.
This is also imperative. We want to understand as thoroughly as possible, how that benchmark is constructed. What percent really is energy? What percent is technology? How much of the world is United States? How much are things like Europe, et cetera. Once we understand that structure very well, we begin to build portfolios for you based on the current ideas and thematic concepts that we have.
But as we do that, the third rule comes into play, which is always make sure you blend non-correlated or negatively correlated types of securities together.
That's just typically called diversification, but it's never been more important. In fact, it's even been very important this year. So let me give you an example. As we said in our presentation earlier, indeed, our forecast has not been right for the first six months of this year, though the rebound so far has been strong.
Well, what do you do in such situations? Because we had a portfolio designed for an up-market and for growth stocks to continue to lead. That didn't happen in the first six months of the year. But, because of our diversification, though we did fall along with the market, we keep you and ourselves in the ballgame. We don't veer so far from the benchmark. We had overweights to places like energy. We have holdings in things like pharmaceutical companies and even materials companies, all of those held up better in the downturn. They were great diversification and they keep you in the game. So that even in years that don't go the way we expect, you're still very much on track for your long term goals, especially as things turn up.
The last piece—the fourth rule is the most important one, indeed. And that is always know you could be wrong. So never veer from those first three rules.
When we put all of that together, the plan that we make for you to maximize the likelihood of you getting to your long term goals. And we couple that with the basic portfolio discipline that we enact for you each and every year—regardless if our forecast is right or wrong—is ultimately what gets you to those long term goals despite anything that may happen in the short term. That's part of our commitment to you. We do that each and every time.
Next, though, people often ask why is it so important to stay disciplined during volatility, or said differently, if a bear market occurs, why not get out?
Well, first of all, one of the things that's so important is that being in the market is the number-one most imperative thing we can express to you. It is true that at times we make may take defensive actions in portfolios, but those are going to be relatively rare and comparatively rare, we won't do that very often.
Instead, what matters the most is time in the market. So let me say this a different way, because what matters in this business so often is counterintuitive to the way we would normally think because most people would say to themselves, of course, well, things seem dangerous. Shouldn't I get out to protect my assets? It sounds reasonable. But in fact, it's the exact opposite thing that you should probably do.
Think about your goals and your long-term plan. If you have goals for growth and there's somewhere, you need to get financially into the future, then you need the returns of the stock market. Well, how do you get the returns of the stock market? You don't get them by being out. You get them by being in. All the returns of the stock market, extant, include bear markets. In fact, stocks return seven to 10% per annum very consistently over time, inclusive of the bear markets.
So it's better to miss a bear, if you have to, even though that can be painful, and make sure you still stay exposed to stocks.
One of the great responsibilities of this business is to make sure we do the right thing on the upswing. It may not seem so, but flirting with a 20% drop is common as air in the stock market. In fact, once every three years at least we flirt with a 20% drop. Sometimes it's 18. Sometimes it's 22%. It flirts with those. It gets everyone riled up. But the fact is, in the vast majority of those cases, it's not the right thing to just simply go defensive because things have been down. Instead, you anticipate that updraft and make sure you capture that appropriately. It's truly one of the keys to this business. That, which is counterintuitive, is often correct to do on the basis of the stock market.
But if we do go defensive, what would that look like? And how do we actually think about something like that? Well, it is true. In our history we've gone defensive a handful of times. We haven't done it very much recently, but the truth is, especially in the last 10 to 12 years, it's been good to be invested in the stock market. Though there have been drops, they haven't lasted long and they've gone on to new highs.
So that's been a good decision, but what do we look for? Well, there's really three important factors. The first one is we need to perceive that there will be true duration and true magnitude. And let me just put that into some context; average bear markets, depending on how you look at them tend to fall around 30%, sometimes even much more than that. If you think about 2008, that flirted with 60% at a certain point.
So we need that magnitude. What we've seen so far this year, if it is the bottom that we've registered in late June, perhaps it's not, but we think there's a good case that it is—if that's so then this has been about six months and around just a little over 20%. And so the magnitude part, it flirts with 20 it's close to 20, it gets people very excited, but is it really the right idea to go defensive from the market when really, in fact, it was only down more than 20% for just a few weeks? Okay?
So that's the magnitude part. You need to see a lot of magnitude, potentially. Second part is duration. What we really look to sidestep is the type of bear market that lasts 18 months, even longer than that in some cases. Those are comparatively rare, but of course, those are also the most painful ones.
They also give you a bigger window to try and navigate that because if a bear market's going to only last for six months, not only is that difficult to try and trade around and navigate, you may actually even ask yourself, what is the point of trying to dance around that, when just six months later the market starts to rebound again? And I think that's a pretty good disciplined way of thinking about things.
Said differently, if you think about the greatest investors of all time, your Warren Buffets of the world and so forth, they don't even make attempts to call bear markets. They just ride them out. They see things as opportunities and they just keep going forward in the way that we often would advise our clients. But there's one last piece that's imperative to trying to think through a bear market. And that is maybe you have the duration. Maybe you have the magnitude, but what you also need is some information that no one else has.
Let me say that differently. The stock market is a discounter of what's widely believed and widely discussed. If people are widely worried out there as they are today, many people thinking about just how pessimistic they can get. And one of the things that Ken and I spoke about just a few days ago was just how much people can get overconfident about their pessimism.
You can get very overconfident about how bad things can be, and that's what we see today. And so that in that environment we'd have to see something that's actually even worse than the way people feel because in order for it to be priced into the stock market, it has to be something different than the way people are already feeling badly. It has to be even more.
We don't see that today. Instead, what we see is actually a brighter world than most people can fathom. So, we just don't have the criteria from this moment, let's say to go defensive, because we think the magnitude is behind us and it flirted more with like 20% than it did something much larger, at least so far. The duration of it has been something more like six to seven months versus the very, very long type of bear market that can be more like 18 months.
And so if we already have registered a bottom and knowing that people are more pessimistic than we think the world is, and we think it's more positive, then we really don't have the basis on a go forward—and looking at how the world is situated, to go defensive. But those are the three main things that we'd want as criteria in order to really start to get serious about taking your money defensive and out of the market. Because just as we said, this is one of the most dangerous things you can do.
Now, in closing, I'm always asked about how is it that you can navigate this? It's so difficult to do. How do you maintain your discipline? Because it's so easy to say, gosh, please be patient, please be disciplined. But when you sit at home and you see the value of your assets doing this and doing back-flips every day, it's exceptionally difficult. And we know that and we appreciate that.
Well, the first thing is that you should be glad that you hired Fisher Investments because the firm is specifically grown and built around the idea of helping you get through this. And let me just paint you a contrast. Many of you will have worked with another advisor at some point or another investment manager. If you can even get ahold of that person and you tell them the things that you're frustrated with, they may or may not listen to you.
And if they do, they may just do something to appease you. You know, I'm very scared. Let's sell some of these stocks that have fallen the most, they're dogs anyway. Okay, let's do that. Now you feel better? And let's buy something else. We don't do that. We do exactly the opposite.
Our job is to keep you disciplined and patient on the path that we've set out for each other, because it is that thing and that thing alone, that gets you to your long term goals. So what do we do at Fisher Investments? You have an Investment Counselor who knows you, your situation, your goals, understands you as a person what's important to you, and you can speak through all of your emotion or any of your concerns as we go through them. You have that capability. In fact, you can do it anytime you want.
It's a great help, but we do even more. Just about every single day, we publish something online, an analysis of what's going on out there up to the minute. If you've ever been to one of our video conferences, you know that you can attend a small video conference where you can speak to one of our senior analysts and ask them as many questions as you want about what's going on for as long as you want.
If you've seen our web seminars where people such as myself and other senior members of the firm give you a full presentation about how we see things. We do that monthly.
And lastly, I'm very proud to say that we are starting up our in-person events again. And in fact, last month I was in the Midwest part of the country. This would be in July, we got to get in front of our clients.
We did our seminars. Seminars are one of the best things you can do because you can meet us face to face, ask us questions, not only see who we are, but how we think. And you can hear the full breadth of how all of us are thinking. We go around the country each year to do that. And I'm very excited that we're presenting that again.
So when you put all of this together, all of these things I've said in the last several minutes, it all boils to one thing. We are in the business of getting you to your long-term financial goals. Everything we do from the plan we set to you all the way on through to the way we actually manage portfolios is designed to maximize the likelihood of you getting to those goals.
We do active management to try to do even better than that over time, which includes occasionally calling bear markets. If we think we can see it and have an advantage, but you should always know that we have you in mind.
And regardless of how any specific year goes, your long term plan is still designed to get you to where you need to be. And nothing about this year, for example, has changed that. Thanks very much for listening and here's to a great rest of 2022.
[START TRANSITION MUSIC]
Well, that was Mike Hanson, Senior Vice President of Research and a member of our Investment Policy Committee here at the firm. If you want to learn more about the topics he discussed today, you can visit the episode page on our website, Fisher Investments.com.
You'll find a link to that in the show description.
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And if you have questions about investing or capital markets that we can cover in a future episode of Market Insights, email us at firstname.lastname@example.org. We'd love to hear from you, and we'll answer as many questions that we receive as we can in an upcoming episode.
Until then, I'm Naj Srinivas. Thanks for tuning in.
Investing in securities involves the risk of loss. Past performance is no guarantee of future returns. The content of this podcast represents the opinions and viewpoints of Fisher Investments, and should not be regarded as personal investment advice. No assurances are made we will continue to hold these views, which may change at any time based on new information, analysis or reconsideration. Copyright Fisher Investments, 2022.
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