Great Expectations (cont.)

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Down markets don’t destroy wealth. They just temporarily reset portfolio values. These resets happen every day and you shouldn’t (unless you’re a delusional day trader) act on them. 

So why act on trends that occur over months, quarters, or even a couple of years by changing a sound, long-term investment strategy? 

Reaction to short-term trends that cause you to deviate from your long-term investment plan almost always destroys wealth (e.g., losses are realized; markets—or asset classes—turn, but you’re reluctant to jump back in at higher prices; the opportunity cost compounds over time). 

This loss is not likely to be recovered without deliberately increasing the overall risk of your portfolio. Would you be willing to adjust that risk downward again after a strong, short-term run-up in prices? Again, not likely. 

So grit your teeth, stick with your plan, and rebalance according to the plan. 

This goes for advisors as well. The best ones keep you focused on the core principles, core strategies, and core long-term expectations that you signed up for and will deliver for you over time. They don’t change horses in midstream because the current changed or got stronger or weaker. They prepared for the inevitable changes in the current and put you on the best, most reliable, and experienced horse from the start. 

The worst advisors lose focus and react like the worst investors. We saw this after the global financial crisis of 2007-2008 when advisors cut back on stocks and loaded up on alternatives just in time for a roaring stock market. 

Recently, many advisors and investors shifted portfolios to large, high-priced growth stocks and away from value stocks just in time for a turn in performance. Chart 1 shows the kind of short-term trend that can cause investors to lose their long-term focus. Chart 2 shows the turn. Whether this short-term trend for value stocks continues remains to be seen. We know the long-term has shown value stocks to have a higher expected return than growth stocks due to their higher perceived risk. 

The Russell 1000 Growth, Russell 1000 Value, Russell 2000 Growth, and Russell 2000 Value are indexes used by many index fund providers. DFA US Large Value (DFLVX) and DFA US Small Value (DFSVX) are structured asset class mutual funds we use as proxies for asset class returns. Our clients own these funds in varying percentages of their portfolios along with other funds covering other asset classes. This illustration was prepared for a client based on their starting date with Equius. Over the full period, April 2016 to June 2022, large and small value stocks are still trailing large growth stocks in performance. The illustration is for informational purposes only. 

Over the past two years, Asset Class articles like Preparing for the Turn (June 2020), A Historic Opportunity (August 2020), Charting a Good Value Story, The Turn (November 2020), and Market Declines and Great Expectations (June 2022) demonstrate our commitment to good financial science, good behavior, and higher compound rates of return. It also shows respect for our clients’ best long-term interests. 

Our focus on a simple (but not simplistic) investment strategy combined with a consistent discipline has served us and our clients very well for almost 30 years and we intend to maintain that focus in the future. 

Productive, evidence-based evolution within our industry remains our overriding goal as investment professionals. 

Equius Partners, Inc. is a Registered Investment Advisor.

Past performance is not a guarantee of future results. The data and information set forth herein are provided for educational purposes only and should not be considered tax, legal or investment advice; a solicitation to buy or sell securities; or an opinion on specific situations – as individual circumstances vary. There is no guarantee an investing strategy will be successful. Investing involves risks, including possible loss of principal. Diversification does not eliminate risk, including the risk of market or systemic loss.

Please consider the investment objectives, risks, and charges and expenses of any mutual fund and read the prospectus carefully before investing. Indexes are not available for direct investment; therefore, their performance does not reflect the expenses associated with the management of an actual portfolio.

© 2022 Equius Partners, Inc.

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