One tenet that endures in the world of portfolio management is "time in the market is your ally." As an investment advisor, you've worked with a wide range of strategies. However, there's one basic principle that you should always remind your clients (and yourself) of: patience is a strategy, not just a virtue.
The Long Game: Playing for Consistency Over Time
Consider this — the longer an investor stays committed to a strategy, the higher the probability of achieving the targeted returns. This isn't just speculative; it's backed by hard data. Historical performance across numerous asset classes has demonstrated that the range between the lowest and highest compound annual growth rate (CAGR) narrows significantly as a portfolio is held over longer periods.
For example, short-term market dips may skew the perception of an equity fund's performance. However, over a 10-year period, the volatility smooths out, often resulting in a return that aligns closely with long-term market averages. The S&P 500, for example, has experienced various ups and downs over the decades, but the long-term view shows a trend towards growth.
The Peril of the Tinkerer
Studies have repeatedly shown that a significant number of mutual fund investors have actually lost money, not due to the fund's performance, but because of their own tendencies to tinker. The inclination to jump ship when waters get choppy, or to second-guess a well-researched strategy at the first sign of trouble, can be detrimental.
Consider the scenario where an investor leaves a fund after a period of underperformance, only to find themselves in a new fund that might soon experience its own downturn. This reactionary behavior resets the investment clock and subjects the portfolio to what could be avoided by a steady hand — short-term volatility.
Each time you switch a client's investment portfolio following a period of underperformance, you're essentially hitting the reset button on their investment journey. This isn't merely a metaphorical step back—it's a literal one. You are not just changing the vehicle; you're also altering the trajectory. And with every change, you subject the portfolio to the initial, often wider, spread of potential returns.
Advising with Patience
As an advisor, it is your responsibility to steer your clients towards a disciplined approach. Remind them that historical returns have favored the patient investor and that market timing strategies rarely outperform simple, long-term investing.
Educate your clients about the historical volatility of different investment periods. Show them that a portfolio's worst year can look vastly different from its average over a decade. And most importantly, teach them to resist the knee-jerk reaction to short-term market news.
Divergence in Worst and Best Case Timeframes
Clients should also be made aware that their investment portfolio's performance does not move in perfect correlation with the broader stock market. The worst year for the stock market as a whole may not coincide with the worst year for a particular investment strategy or portfolio. This is due to factors like asset allocation, sector focus, market cap weighting, and investment style, which can all influence how a portfolio performs relative to the market indices.
Moreover, the best-case scenarios for a client's investments will also differ from the market's best-case scenarios. An advisor should provide examples of how a diversified portfolio might not capture the full extent of a bull market in exchange for a more tempered decline during a market correction. This divergence is a natural consequence of risk management strategies that aim to smooth out returns over time.
In conclusion, time in the market trumps timing the market. As investment advisors, it's our responsibility to not only manage wealth but to manage behavior and expectations. By encouraging our clients to remain steadfast in their investments, we help them to build a foundation for success that will stand the test of time. Remember, it's not about the perfect timing; it's about the time you give your investments to grow and prosper.