I grew up in a big family. As one of the middle children of six, there wasn’t a moment of quiet in my formative years, let alone clear memories of outright peace. Don’t get me wrong; it wasn’t war either. It felt more like a long-term truce.
Now as adults, my siblings and their families converge upon Traverse City each summer. My formerly big family has become huge. The original six have multiplied into 23. The complexity of it all seems exponential.
We’ve now got kids under five, all the way up to age 20. We’ve also got vegans and meat lovers, too. Just like my parents, my siblings were also cursed with a very opinionated lot. The many elements that determine the overall outcome of our reunions are incalculable. And, yet, the contained chaos works.
It reminds me of the way times have changed in financial markets. Information now flows faster and conflicting opinions pop up on our devices every second. Today, the opinions on the current state of the economy and the path of the markets are fast and furious.
Some are warning of an imminent recession and others call for continued growth even as we’ve reached one of the longest economic expansions in modern times. Bonds are clearly signaling a slowdown and stocks keep hitting all-time highs. Just like my family gatherings, the environment is a cacophony of conflicting opinions. You simply have to know what you can and cannot control.
When it comes to building and managing investment portfolios, there are three elements that matter most, in my view.
To start, you can control the asset allocation. That’s simply about finding the appropriate mix of stocks and bonds. Studies show that your portfolio’s asset allocation is the factor that most affects portfolio returns and overall risk.
Next, you can control the level of diversification inside your portfolios. Diversification is about finding the right mix within your asset allocation. As I remind new clients when setting our formal investment management guidelines, a portfolio with 60% in stocks isn’t balanced at all if that exposure is represented by just one stock. Sorry Warren Buffett, I really don’t care if it is Berkshire Hathaway. One stock simply isn’t enough for us mere mortals!
Last, we have control over our investment selection process. Whether it’s picking Visa over AT&T or choosing a low-cost index fund over an actively-managed mutual fund, the specific investments in a portfolio really do matter. For example, the rising tide of a bull market tends to lift all boats. However, in a recession, AT&T will likely provide portfolio protection that Visa will not.
Just like my family gatherings, both the speed and volume of market opinions has picked up exponentially. Today, the near-term outcome seems less predictable than usual. My advice is to focus on what can be controlled and what cannot is best handled with a healthy sense of acceptance. As I’ve learned at my family reunions, pouring yourself an extra glass of wine really can’t hurt either!
Jason P. Tank, CFA is both the owner of Front Street Wealth Management, a purely fee-only advisory firm and the founder of the Money Series, a non-profit program committed to providing open-access to financial education, for all. Contact him at (231) 947-3775, by email at Jason@FrontStreet.com and at www.FrontStreet.com