Let these investment fundamentals help you make smart decisions
Staying informed in today’s market sometimes feels like attending a three-ring circus. There is a lot of rapidly changing content to take in among the websites, publications, and broadcasts vying for your attention. But to make smart investment decisions, tune out the white noise and pay attention to the following investment fundamentals that have withstood the test of time:
Importance of Cycles: If you look at historical records, you’ll see that there is strong evidence to suggest cycles repeat themselves on three different frequencies:
- Multigenerational cycles usually run over a 60- to 80-year period. Watch for political, social, and economic trends that can create four “seasons” with corresponding effects on what kind of market “weather” to expect. Demographic changes, credit availability, and technological developments can also affect the trends for each season. Because of their long duration, multigenerational cycles are most helpful when viewed as background for bull/bear cycles.
- Secular bull and bear cycles usually run over a 16- to 18-year period. Shifts in stock valuation in terms of absolute and relative price-to-earnings ratios and broader sentiment are good indicators to watch. During bear cycles, many investors focus on risk management. Bull cycles are generally a good time to buy into the markets and stick with investments.
- Cyclical bull and bear cycles usually run over a three- to five-year period. The expansion and contraction of corporate business cycles, interest rate trends, and ranges in historical valuation within sectors are good indicators to watch. These factors may help investors determine which industries may outperform others.
Understand Investor Psychology: These boom-and-bust cycles persist despite the advancement of technology because of human nature. The fear of losing when markets are down can be as strong a motivator as the fear of missing out can be when markets are going up. Another consideration is the fact that long-term experiential memory is only about three years. How did your investment behavior and feelings change after the fallout of 2008-2009? Are you back to some of your “old” habits and feelings? Let’s try not to forget those hard-earned lessons.
Emotions Are Contrary Indicators: Good investing rarely feels good. Managing your emotions can be the toughest part of investing. Feeling good about your portfolio could be a signal to pay attention to valuation. Trim holdings so a few outsized positions don’t drive performance. And when you are feeling stressed about a general market slump, revisit valuations of companies that are worthy of consideration.
Regression to the Mean Is Real: Sector out-performance tends to run out of steam after about three years. It rarely has a longer run than that. The first year’s out-performance may come as a surprise. The second year, fundamentals emerge more clearly and pull in investors. By year three, expectations are high, as are inflows, but that rising confidence sows the seed of disappointment as well. So, attempting to time sectors, like timing the market in general, is often more frustrating than it is effective in terms of long-term portfolio performance.
Perseverance Pays, so Pace Yourself: Investing is a lot like baseball. To win, you have to swing the bat. But instead of always swinging for “home runs,” focus on base hits. If you pick quality investments that are appropriate for your goals and risk tolerance, pay attention to capital preservation, and maintain broadly diversified market exposure, even at minimum levels, you are well-positioned to do well in the long run.
Dividends Matter: To continue the baseball analogy, dividend stocks are ones that may help you get on base consistently. Plus, they can help you manage two key investment risks: overpaying for growth and taking too much risk. Consistent dividend growers often spotlight superior business models offering resilience in volatile markets.
Time Is Your Friend: Investing for the long term has value. It gives your winners more time to work. And it has the power to smooth out some of the inevitable losers in your portfolio. Again, dividends can make sense. Reinvest dividends from dividend growers, and take cash from the dividend payers. This approach works best over a multiyear basis, not quarter over quarter. Proper attention to asset allocation helps maximize the benefits of time on overall portfolio performance as well.
Being mindful of these seven fundamentals can help you tune out the financial “noise” in your ears, and can also help save your sanity— especially during periods of economic uncertainty and market volatility—by helping you focus on the things you can always control: your emotions and your choices.