I love it when this magazine arrives in my mailbox. Month after month, it provides a window to the world of Eastside companies. Better yet, it provides insights on the people who are giving it their all with creative ideas to keep up with companies down the street — and those across borders — in an ever-changing economy.
And what a challenging economy it is. The capital markets are ruthless in taking down companies that are not able to continuously boost revenue, improve profits, or add customers. The irony of building successful companies is that those who remain at the top are also well-versed in destroying components of their own business to make way for the new ideas percolating in the back room.
On top of that, companies are competing in a global marketplace that offers advanced technologies and cheaper labor within an uncertain political climate. The impending exit of the United Kingdom from the European Union is just one example of the chaotic unfolding of global trade. Closer to home, the rhetoric of a national election, and its impact on trade around the world, is closely watched by global corporations.
In looking at the unfolding of world events, it is only natural to ponder how these forces might impact my portfolio. Should I invest in green technologies? Should I reduce my allocation to international equities? Should I sell everything if that person inhabits the White House?
Building a diversified portfolio of index and passively managed funds addresses these questions on many fronts. First, history has proven that it is next to impossible to own a portfolio of top-performing companies that over time outperforms a broad market index.
Let’s look at green companies. Over the next 20 years, certain companies will become titans in this emerging field, but it’s extremely difficult to pick winners in a nascent field. There is one way that assures you will own the leading green companies of tomorrow: owning all of them today.
How about international companies? The primary role of an international allocation is that of diversification, and by its very nature, a diversified portfolio will always have one component that underperforms the other. One doesn’t have to look too far back to see an extended period (2000 through 2008) when international stocks significantly outperformed their domestic counterparts. Investors who forego international holdings in a portfolio will inevitably suffer during a similar stretch sometime in the future.
Finally, what am I going to do with my portfolio if that person moves into the White House? Regardless of which party gets elected, you can be sure of one thing: Another bear market is on the way, and all your common stock holdings will suffer a temporary decline of 30 percent or more. This decline might occur next year or 10 years out. That’s the stock market for you: two steps forward and one step back in its meandering journey toward generating higher returns than the miniscule yields offered by CDs and bonds. Your task is to make sure you secure those higher, long-term returns by not fiddling with your portfolio today.
From a financial planning perspective, the goal isn’t to try to avoid bear markets; it is to choose an allocation between stocks and bonds in such a way that you never have to sell your stocks in a bear market to pay your monthly bills.
This unfolding of life is a fascinating spectacle, and we are invited to participate in it, not only through our careers, but in saving and investing for our retirement. A simple financial plan and your commitment to this plan in all types markets, economies, and political parties will allow you to accentuate both.