Current market environment performance of dynamic, risk-managed investment solutions.
By Will Hubbard
I recently looked back at FPI President Jerry Wagner’s article “A ‘living in the moment’ guide to investing.” It’s a great read if you have a few moments. In it, Jerry provides insightful reflections on investor psychology and historical context, which is so important for managing an investment portfolio in today’s uncertain times.
Jerry points out that research says people are most happy and content when they live in the moment—though they are heavily influenced by the past and their hopes for the future. Similarly, active investment management considers the past but responds to current conditions.
As Jerry puts it, “While active management draws upon history as the basis of each active strategy, it is continually focused on what is happening now. Active management strategies cannot see into the future—they can only seek to realize what the present provides. They are based not on forecasting, but rather on the probability of favorable outcomes—and they seek each day to profit from them.”
This dynamic, risk-managed approach seeks to “invest for the moment” but to be responsive, flexible, and diverse enough to “be prepared when the moment changes.”
But how quantitative investment strategies and people “invest in the now” can be quite different. While quantitative investment strategies focus on data to make investment decisions, investors can sometimes be swayed by the emotions resulting from this data (for example, media headlines), which can be detrimental.
Taking emotion out of investment decision-making
I had the honor of officiating a good friend’s wedding recently. As someone with a quantitative background, I have no problem breaking down complex technical topics to present information to a group; however, summarizing my deepest thoughts and feelings on love and hope is a different story.
My remarks on love ended up paralleling to some degree Jerry’s thoughts on investing: In both, the decisions we make today are influenced by past experience and lay the groundwork for the future we envision.
But for investors, that past experience may introduce unhelpful emotions—specifically fear and/or greed—into the investment decision-making process. For example, those who began their investment journey in 2010 may view the market through the lens of steady growth and optimism, while those who started around 2000 carry memories of the dot-com bubble; “the lost decade;” and the incredible returns from international, non-U.S. investments. Your experience will frame how you perceive what is happening today and the decisions you make—for better or worse.
“Investing in the now” in complex times
Given the roller coaster of events and information investors have been on recently, it’s easy to see how emotion—and confusion—may creep into the investment decision-making process.
In market news, The NASDAQ 100 is still up almost 30% year to date, but small caps (as represented by the Russell 2000 index) are down 5.91%.
On the geopolitical front, the war in Ukraine continues, and the world is now grappling with the horrific events in Israel.
Recent economic data is mixed. Unprecedented interest-rate hikes over the last year are making housing even more unaffordable for Americans. However, advanced Q3 GDP estimates came in at 4.9%, the best quarter since Q4 2021. In addition, consumer expenditures, along with wages, are on the rise—more tailwinds for the market. Combine that with the Federal Reserve’s rate decision this week and Apple’s earnings, and maybe the outlook is brighter than it would appear.
Seasonality may also contribute to a positive outlook. Over the last 20 years, the period from October 30 through November 6 has been strong for stocks and weak for bonds, with the Russell 2000 gaining 1.47% on average, the S&P 500 up 0.99%, and the 20 Plus Year Treasury Bond ETF down 0.68%.
Over the past 20 years, the period from next week through the remainder of the year has been strong for small caps, which have outperformed large caps. During the study period, small caps were positive 65% of the time. Long-duration Treasurys are expected to have positive performance 65% of the time as well. Even during last year’s rate-hiking cycle, long-term Treasurys were up 3.58% from October 30 through December 31.
With all of these mixed signals, how can investors stay focused? A dynamic, risk-managed approach to investing can help.
Dynamic, risk-managed investing can help investors “stay in the now”
In today’s world of conflicting information and fear-inducing news, a dynamic, risk-managed approach to investing can be pivotal to taking emotions out of the equation and keeping investors on track. As Jerry says in his article, “When you sign up for an active management strategy, you are no longer a slave to your emotions. The strategies are automated. They are developed on computers and run daily on computers. There are no emotions. They just carry out trades that years of research have identified as having an edge over buy-and-hold investing. … It’s all about living in the present. Your investing decisions no longer need to be the result of your fearing the past or worrying about the future.”
By grounding decisions in data and historical context, investors can steer clear of impulsive reactions. Investing in a variety of dynamic, risk-managed investment strategies, like those available at Flexible Plan Investments, can help investors “invest for the moment, but be prepared when the moment changes.” Such an approach makes it easier, even in a rapidly changing environment like the one we’re experiencing now, to stick to an investment plan that “lays the groundwork for the future we envision.”