With so many pressures to think and act short-term these days, investors may need their financial advisors to remind them of the ultimate goal for their investment portfolio. As we experienced in 2008, market “noise” can trigger panic selling, and then later, impulse buying. Incentives for investment managers are increasingly aimed at short-term performance. Industry data seems to suggest that financial advisors are trading more frequently on some advisory platforms. And new products that come to market with the latest bells and whistles are often mere distractions for long-term investors.
The problem with all this short-term thinking is, it may not align well with your clients’ long-term objectives — college and retirement, for example. Those goals can take years, even decades to accomplish. Having recently attended the college graduations of my fourth and fifth children, I can tell you that one of the best decisions I made early on was putting money away and giving it 21 years to grow.
And yet many investors are still quick to give up their current strategies, just because a different investment style comes into favor or a new source of return comes to market. But by the time investors jump on the latest trend, they’ve often already missed the strong performance and end up sacrificing opportunities in the strategies they’ve left behind.
We’ve all seen this happen, even just by watching the waves of investor money flow in and out of different fund categories from year to year and sometimes decade to decade. As we all remember in the late 90s, especially in the US there was a clear bias toward growth stocks for appreciation. Investors didn’t think value stocks would ever have a place in an account seeking long-term capital appreciation. And yet from 2000 onward, value stocks shifted back into favor, fueled by investor demands for better cash flow and less volatility. Looking at 2014 alone, while more than $70 billion flowed into foreign large cap blend funds, more than $40 billion flowed out of large cap growth funds.
Attempting to time market leadership in other regions can also prove challenging. Tactical investors favoring emerging markets (EM) from 2000-2004 and 2005-2009 would have been well rewarded as EM stocks outperformed Europe, the US and Japan over these consecutive five-year periods. During the next five, however, EM posted the worst performance on a regional basis. Our concern is that the shifts in investors’ tastes are coming faster, most often driven by performance leadership. There seems to be a mentality of investing more for the moment than through the market cycle.
With more than 90 years of active management expertise behind us, we think investors with long-term objectives could benefit by setting aside all the market short-termism, getting back to basics and considering strategies that, while not glamorous, have held up well through time.
One example is a balanced approach with a traditional 60/40 split between equities and bonds. As active managers in the business of serving long-term financial needs, we see a real advantage in combining multiple asset classes in one fund, rebalancing regularly and trying to keep investors from making shifts where they end up buying high and selling low.
We think history tells us that a rational balance between equities and bonds is still a very effective way to achieve an investor’s long-term objectives. Consider a 60/40 split between global equities (the MSCI World) and global bonds (the Barclays Global Aggregate Bond Index) compared to equities alone over rolling 12-month periods from January 1990 to December 2014. That mix of equities and bonds had fewer periods of losses and they were generally smaller.
For additional perspective, taking a look at a 60/40 split using the longer-term data available in the US (S&P 500 Index and Barclays US Aggregate Index) offers a similarly compelling illustration of the power of a balanced approach since 1976.
Notably, we’re not the only ones seeing the value of an approach that blends asset classes. Strategic Insights reported that, except for 2008, mixed funds have seen inflows every year for the past decade.True, a balanced approach won’t outpace a pure equity strategy in an upward trending market — but that’s not the point.
What we’re really talking about are ways to help combat the damage of short-term thinking by getting back to a longer-term approach — investing through market cycles rather than being swayed by prevailing conditions. With the current bull market for the MSCI World now in its 78th month and geopolitical concerns increasing around the globe, this is a good time to remember that markets are cyclical. As we all know, no one can consistently call the next market move. Active management —looking for solid fundamentals, ignoring the short-term noise and being patient enough to let good ideas play out — is one of the most powerful forces against market short-termism. Plus, if your clients are focused on a long-term outcome, they need active risk management to help handle some of the bumps along the way.
I’m not suggesting that your clients shy away from new products. They just need a more lasting approach to support the core of their portfolios. For long-term investors, it’s not about choosing what’s available, it’s much more important to choose what works.
 Source: mixed fund flows; Strategic Insight Simfund/GL; Jan 2005 – June 2015
James Jessee is co-head of Global Distribution at MFS Investment Management