“Stay the Course” Doesn’t Mean Ignore the Journey

March seems to be turning into a time of year when something out of our control makes it appropriate to check in and offer an investment perspective in light of external shocks, noise, or distractions.

Five years ago it was the onset of Covid (has it really been that long!?).

Two years ago, it was Silicon Valley Bank (which markets seem to have forgotten already).

Today, the seemingly endless barrage of headlines, executive orders, tariffs, government spending cuts, etc. emanating from the new administration and DOGE understandably make it feel like we’re on the verge of another economic or market event.

I usually write notes like this when stocks are down 10%, 20%, or more. Even with stock prices still near all-time highs, the headlines and the noise make things feel different lately.

It's become impossible to ignore no matter how hard one tries. But ignoring the noise and the distractions from an otherwise sound long-term investment plan isn’t the point.

We can’t just say “stay the course” without acknowledging and planning for what the journey will look and feel like along the way.  

The point is the importance – requirement – of a long-term investment plan that assumes uncertain economic conditions and volatile markets will happen from time to time.  

This shifts our focus from things we can’t control to those we can control. And the time to put guardrails and contingency plans in place is before market volatility picks up or economic weakness arrives. Thankfully, you’ve already done that.

The best guardrails and contingency plan are a diversified portfolio with the right amount of risk for your plan – not based on current market conditions. And it’s the only time-tested journey to long-term investment success.

Because there’s no failsafe signal from the markets that says, “ok, now it’s time to adjust your portfolio before things get a little rocky.” Or, “ok, now the coast is clear to increase your risk.”

By the time the news is out there, markets have already incorporated it into prices. Does that mean that prices are always correct? Not necessarily. But it's almost impossible to front-run the market’s ability to process information and reset prices to time the market successfully.

So, if all the information is out there and reflected in market prices. Where do we stand?

Objectively, market and economic numbers and conditions have recently been quite good.

The S&P 500 is within a whisper of its all-time high. It started the year with positive returns, before falling the last couple of days, following two consecutive years of greater than 20% returns.

International stocks have outperformed US stocks over the first two months of the year – perhaps the bear market in diversification is coming to an end.

Interest rates seem to have normalized, and the prospective return signals from bonds are stronger than in recent memory. And we’re still earning attractive interest on money markets and savings accounts.

Employment and GDP growth continue to be strong. Inflation ticked up a bit last month and is not quite at the Fed’s preferred level, but it is still well within historical norms. Perhaps egg prices are the new gas prices – the one metric that the Federal Reserve has no power over but disproportionately impacts how we feel about prices and inflation.

I could go on, but I think the point has been made and that’s not what this note is about.

If the objective statistics were all that went into investing, we wouldn’t need to worry about “staying the course.”  

In the book Nudge, economist and Nobel Prize winner Richard Thaler describes a fictional being called an “Econ,” who only acts perfectly rationally with no emotion. They’re so rational, they even stop eating their dessert when they’re full, no matter how delicious or much they paid for it! Think of the economist’s version of Mr. Spock.

For countless reasons I probably don’t need to go into, we’re fortunate to be humans, not Econs. It makes it harder for us to invest successfully by subjecting us to our emotional interpretations of the world around us. But it allows us to set the goals that matter to us, which is why we invest in the first place. So, we probably shouldn’t forget about them as a first principle for investing.

Since we’re humans, it's perfectly normal for us to feel a little more nervous about the investment journey needed to achieve those goals. In fact, it also helps us take a reasonable amount of risk to keep us on track. However, the key is not to take investment action based on our feelings about the world around us.

To be sure, tariffs are something that we haven’t encountered for quite some time, and they may have real economic impacts. However, investment returns correlate most closely with company earnings over time, and the best businesses in the US and the rest of the world are still going to work every day to increase their earnings.

In his recent farewell article, Daniel Henninger, a recently retired opinion writer for the Wall Street Journal, wrote that after 825 words a writer risks committing the cardinal sin of boring one’s readers. A sin I’ve no doubt committed in the past. Having reached that in the last paragraph, it's time to sign off.

Thanks for reading.