Asset allocation is widely regarded as the single most important factor driving portfolio returns. It is grounded in financial theory and historical data but also incorporates the individual circumstances and risk tolerance of each investor. In essence, it is mostly science but does incorporate some art.
Time horizon is one of the most fundamental considerations in determining appropriate asset allocation. Investors with a longer time horizon are better equipped to withstand market downturns and recover from short-term losses. This allows them to invest in asset classes that offer greater long-term returns in exchange for certain risk factors such as interest rates sensitivity, relative illiquidity, and volatility.
Many clients at Whittier, due to their multi-generational level of wealth, inherently have long-term investment horizons. Simultaneously, the Whittier investment team is a proponent of U.S.-listed public equities for their returns, inflation protection, tax efficiency, and liquidity. The combination of our clients’ circumstances and our own investment preferences means that public equities have considerable weight within our growth-oriented investment accounts.
Still, due to their volatility over shorter intervals and their unparalleled price discovery, stocks can inherently invite concern and shift an investor’s attention away from their long-term goals. When it comes to stocks, media outlets, pundits, and even our social networks produce reasons for us to madly switch between euphoria and capitulation. Stock market-driven anxiety becomes particularly acute during bear markets. The more volatile the market is, the more immediate and narrow one’s investment perspective seemingly becomes.
Daily news and near-term market developments can be fascinating topics, but they are not particularly relevant to someone with a long-term investment horizon. Even the most seasoned investment professionals need to regularly align their concerns with their investment timeline. To do that, there are a series of helpful questions that should be asked on a regular basis.
Over the course of your investment timeline, we’ll ask:
- Do you think that GDP will be higher or lower than it is now?
- Do you think that consumer prices will be higher or lower?
- Do you think that corporate profits will be higher or lower?
- Do you think that stocks will be higher or lower?
This list of questions could be longer but the point is obvious. If you are an investor with an intermediate to long-term time horizon then the answer to each of these questions is “higher.” Here are a few facts to prove it:
- Over the last 100 years, there hasn’t been a single 10-year period where GDP declined.
- Over the last 100 years, the U.S. Consumer Price Index has been higher 10 years later 93% of the time.
- Over the last 100 years, U.S. housing prices increased 97% of the time.
- In all rolling 10-year periods over the last 100 years, the S&P 500 has delivered positive total returns 95% of the time. It only failed to do so following the Great Depression and the Great Financial Crisis.
Whittier’s investment team goes to great lengths to alleviate the anxiety that stock market volatility can create. We utilize our experience and your input to understand your risk tolerance. We match the duration of your portfolio and your goals. We ensure that our clients’ liquidity needs are comfortably reserved with an appropriate margin of safety. We will be there to answer your questions, address your concerns, and share our best thoughts in any market environment.
Finally, and perhaps most importantly, we know that asset allocation isn’t static. It evolves through time. As your investment time horizon, liquidity needs, and risk tolerance change, we will adapt accordingly.