Applying Decades of Investment Wisdom in the Current Market
By Will Robbins
Principal Investment Officer
There’s no question that recent equity volatility has been unnerving, even for market veterans. The causes have been well reported — a slowdown in China, a massive drop in the price of oil, concerns about the future direction of interest rates, and the list goes on.
But from an investment perspective, the real question is, Where do we go from here? Although it’s impossible to predict the future with any degree of accuracy, I’ve learned from more than two decades in this business that three of the most valuable tools one can have when making investment decisions are research, sound judgment and a long time horizon.
Few organizations in the world can match Capital Group’s experience, global perspective and commitment to investing for the long haul. Capital Group has been around for more than 85 years, and for generations our investment professionals have been handing down lessons learned from firsthand experience and market history.
To that end, a group of portfolio managers and analysts at our firm recently produced an internal report that I found to be fascinating. They interviewed more than a dozen of our most experienced portfolio managers — both working and retired — to glean their thoughts on the current market environment. They also asked the question on many minds these days: does recent volatility, particularly on the downside, portend an imminent bear market?
The wisdom in this report collectively represents hundreds of years of investment experience and knowledge. I’d like to share some of the highlights from these conversations with you.
First, as Bill Hurt, one of our longest-tenured professionals, with more than six decades of investing experience, pointed out, the world has never been in better shape. While people in developed countries enjoy unprecedented conveniences, the emerging markets are just being introduced to innovations that we take for granted, like smartphones and jet travel. As messy as the world may seem at times, Bill is convinced it keeps getting better every day.
In terms of the market outlook, opinions were quite varied. This comes as no surprise given that a hallmark of our investment process is having a team of investors with diverse thinking and viewpoints. But some common themes did emerge. First, though certain sectors appear to be overvalued, the market as a whole doesn’t seem unreasonably frothy. China and the Middle East are the biggest wild cards at the moment, but the U.S. economy appears to be in relatively good shape and the Federal Reserve is likely to keep rates low for some time.
In terms of whether we’re nearing a market top or even the start of a more prolonged downturn for stocks following a seven-year bull market, several managers noted that although history doesn’t repeat itself, it certainly rhymes. Short-term market moves are typically driven by fear and greed. Greed dominates during market tops, and fear is rampant at the bottom.
Our storied team noted that bull markets tend to reverse course because of a sudden and unexpected negative catalyst, be it in monetary policy, a shock affecting the financial system, the threat of war, or some significant macroeconomic event. No one rings a bell to indicate the turn in direction, so it is essential to always be on guard.
Above all, there were three big lessons from this group of investment veterans that I’d like to leave you with:
- Patience is the most important ally you have in all market environments.
- Discerning investors can take advantage of market dislocations during volatile periods, such as we’ve seen lately.
- Bear markets, when they do happen, tend to reflect important turning points in the economy. it’s crucial not to abandon your investment approach during tough times, because resulting market recoveries tend to be powerful and quick.
That’s why having the right strategic allocation — the appropriate mix of stocks, bonds and other investments, based on your individual goals and risk tolerance — is so critical. It allows you to stick with your plan and can help you avoid making the wrong moves at inopportune times. Plus, by rebalancing your portfolio on a regular basis, you’ll keep your targets in place, helping to improve the chances of achieving your overall investment outcomes.
While I’m a strong advocate of rebalancing, there’s no bigger champion of this approach than Bill Hurt himself, and he has more than five decades of experience to prove it works!
Will Robbins is Principal Investment Officer and a global portfolio manager for Capital Group Private Client Services. He has more than two decades of investment experience and has been with Capital Group since 1996.