While the Centers for Disease Control has warned Americans to be prepared for a wider US outbreak of the coronavirus, one hazard it did not detail was the risk of whiplash to traders and investors watching the market averages. Last week witnessed a 1,200-point plunge in the Dow followed by a 1,200 gain this week. Virus threats with concomitant economic blowback have sent unsteady investors reeling. Investor confidence, as surveyed by the American Association of Individual Investors, plunged as market volatility, a gauge of perceived market risk, spiked to its highest level in nearly a decade.
The markets’ maelstrom is an opportunity for investors willing to take a deep breath, take a step back, and remind themselves of the purpose of their investment portfolio. For some, it’s long-term wealth accumulation. For others, their financial assets support their current lifestyle spending. From a numbers perspective, it’s all about cash flow. Young people are generally accumulators. Their salaries support their current lifestyle and they’re making periodic contributions to their financial holdings through retirement plans and other savings. Their investment time horizon – the period until they need to rely on their portfolio – is long. Retirees, on the other hand, often rely on current cash flow from their investment portfolios to meet their lifestyle needs. Though most investors have a pretty good general idea of their routine and special cash flow needs over time, they should construct a detailed cash flow plan on paper to reveal the level of spending they will in fact require over the short term (one to seven years) and longer term (more than seven years).
The art and science of investing involves determining how best to deploy an investment portfolio to balance the certainty of meeting future cash flows with the benefit of market growth – without letting emotions get in the way. Investors with the resources could simply set aside their future desired cash flow in cash or Treasury bills, but that would require an enormous, low-returning portfolio and missed opportunities in exchange for belt-and-suspenders certainty. The other extreme would be to funnel an entire portfolio into high-returning, but volatile, assets and hope the market doesn’t plunge at a time when cash flow is required. This strategy has the potential for growth, but at the risk of sleepless nights and failure. The right solution is somewhere in the middle: an investment strategy the matches portfolio investments with each cash flow need. Goals-based allocations matches more predictable, lower-returning assets with shorter-term cash needs and higher-returning, longer-term investments with longer-dated cash needs.
While equities are inherently volatile and unpredictable in the short term, as the coronavirus experience has revealed, they become increasingly predictable for each year the investment horizon is extended. Statistically speaking, the S&P 500 is expected to lose ground 22 per cent of the time over a one-year time horizon, making equities a poor short-term investment vehicle. Extend the time horizon, however, and the certainty of equity returns improves. Those investors with a 10-year time horizon will enjoy investment gains from the S&P 500 96 per cent of the time. And that’s taking into account the volatility associated with the financial crisis, the Asian contagion, the taper tantrum and the tech bubble.
For shorter-term investment horizons, intermediate-term bonds fit the bill. Core bonds have shown to deliver positive returns over virtually every three-year holding period. Short-term bonds can boast positive results over a one-year time frame. Goals-based investing, by matching the most appropriate assets with the time horizon of cash flows, seeks to maximize investment certainty while employing the lowest commitment of upfront assets, leaving the best opportunity for growth. The strategy blends expected growth and investment time horizon to deliver a desired outcome.
Please do not hesitate to reach out to Cresset to learn how goals-based investing could help you.
Cresset is an independent, award-winning multi-family office and private investment firm with more than $60 billion in assets under management (as of 11/01/2024). Cresset serves the unique needs of entrepreneurs, CEO founders, wealth creators, executives, and partners, as well as high-net-worth and multi-generational families. Our goal is to deliver a new paradigm for wealth management, giving you time to pursue what matters to you most.
The Power of Patience
While the Centers for Disease Control has warned Americans to be prepared for a wider US outbreak of the coronavirus, one hazard it did not detail was the risk of whiplash to traders and investors watching the market averages. Last week witnessed a 1,200-point plunge in the Dow followed by a 1,200 gain this week. Virus threats with concomitant economic blowback have sent unsteady investors reeling. Investor confidence, as surveyed by the American Association of Individual Investors, plunged as market volatility, a gauge of perceived market risk, spiked to its highest level in nearly a decade.
The markets’ maelstrom is an opportunity for investors willing to take a deep breath, take a step back, and remind themselves of the purpose of their investment portfolio. For some, it’s long-term wealth accumulation. For others, their financial assets support their current lifestyle spending. From a numbers perspective, it’s all about cash flow. Young people are generally accumulators. Their salaries support their current lifestyle and they’re making periodic contributions to their financial holdings through retirement plans and other savings. Their investment time horizon – the period until they need to rely on their portfolio – is long. Retirees, on the other hand, often rely on current cash flow from their investment portfolios to meet their lifestyle needs. Though most investors have a pretty good general idea of their routine and special cash flow needs over time, they should construct a detailed cash flow plan on paper to reveal the level of spending they will in fact require over the short term (one to seven years) and longer term (more than seven years).
The art and science of investing involves determining how best to deploy an investment portfolio to balance the certainty of meeting future cash flows with the benefit of market growth – without letting emotions get in the way. Investors with the resources could simply set aside their future desired cash flow in cash or Treasury bills, but that would require an enormous, low-returning portfolio and missed opportunities in exchange for belt-and-suspenders certainty. The other extreme would be to funnel an entire portfolio into high-returning, but volatile, assets and hope the market doesn’t plunge at a time when cash flow is required. This strategy has the potential for growth, but at the risk of sleepless nights and failure. The right solution is somewhere in the middle: an investment strategy the matches portfolio investments with each cash flow need. Goals-based allocations matches more predictable, lower-returning assets with shorter-term cash needs and higher-returning, longer-term investments with longer-dated cash needs.
While equities are inherently volatile and unpredictable in the short term, as the coronavirus experience has revealed, they become increasingly predictable for each year the investment horizon is extended. Statistically speaking, the S&P 500 is expected to lose ground 22 per cent of the time over a one-year time horizon, making equities a poor short-term investment vehicle. Extend the time horizon, however, and the certainty of equity returns improves. Those investors with a 10-year time horizon will enjoy investment gains from the S&P 500 96 per cent of the time. And that’s taking into account the volatility associated with the financial crisis, the Asian contagion, the taper tantrum and the tech bubble.
For shorter-term investment horizons, intermediate-term bonds fit the bill. Core bonds have shown to deliver positive returns over virtually every three-year holding period. Short-term bonds can boast positive results over a one-year time frame. Goals-based investing, by matching the most appropriate assets with the time horizon of cash flows, seeks to maximize investment certainty while employing the lowest commitment of upfront assets, leaving the best opportunity for growth. The strategy blends expected growth and investment time horizon to deliver a desired outcome.
Please do not hesitate to reach out to Cresset to learn how goals-based investing could help you.
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About Cresset
Cresset is an independent, award-winning multi-family office and private investment firm with more than $60 billion in assets under management (as of 11/01/2024). Cresset serves the unique needs of entrepreneurs, CEO founders, wealth creators, executives, and partners, as well as high-net-worth and multi-generational families. Our goal is to deliver a new paradigm for wealth management, giving you time to pursue what matters to you most.