Hold the Line Through the Turns
Some of our colleagues at Edge are driving enthusiasts; thus, as a follow-on to our first quarter outlook theme “Engine is Still Running Under the Hood,” we find it only appropriate to follow it this quarter with the remark “Hold the Line Through the Turns.” In our investment philosophy, we believe that risk is not defined as any one thing. In some cases, risk can be defined by the traditional statistic of standard deviation (or volatility). For others, it may be a shortfall of income or the inability to meet a charitable giving rate. In short, risk is really defined by each
investor as the probability the assets they own do not serve the purpose for which they hold them. As said last quarter, literally an investment portfolio is the “vehicle” that is intended to get you from here (wanting to achieve a goal) to there (accomplishing that goal). Naturally on the course from “here to there” twists and turns will be encountered. From a financial market perspective, looking into the near future there is no shortage of turns in
sight. The US Federal Reserve is going to raise interest rates, US economic growth in Q1 is slower than expected, the US dollar is rising, commodity prices remain volatile, Chinese economic growth is slowing while equity markets are rocketing, European quantitative easing is working resulting in euro weakening, Greece is running low on funds, and the list goes on and on.
This is where a driving lesson may benefit our investment decision making process. Road courses are designed to have hair-pin turns that are dramatic reversals of direction or series of turns intended to slow the driver down. Strategy is important to maintaining speed efficiency. It is said that the fastest line through a corner is the one that allows the greatest radius, or the straightest path. Said differently, chart your course through the turn by anticipating the big shifts in direction and then hold the line making as few adjustments as possible along the way.
Years into the bull market following the financial crisis, it is natural for investors to look to every twist and turn of fate in the market as the sign of the end – this remains an unloved market. From our perspective, the big picture remains clear. The global economy remains on the uptick. The relative maturity of the US economy is where Europe and Asia aim to follow. Sure the trajectory through the turn requires the wheel to push a different direction,
such as the shift from higher valuation assets in the US to lower valued international assets, but we must remain invested. On the whole, risk assets like equities remain attractive relative to traditional fixed income on a valuation basis coming out of the turn. While the near-term scares will test the grip of our tires on the road, our hands remain steady on the wheel.