Characteristics of a Long-Term Investor | Erik Averill, Brandon Averill | AWM Insights #12
We've said that trying to predict markets is a dangerous game to play, so now that the country begins to open up - how do we answer the frequently asked question of what the market will do over the coming months? We typically start our response by revisiting why our clients are invested in the public markets in the first place. The answer should not be to try to make a significant return within the short-term - 12 or 18 months - but is most often the goal of generating wealth over the long-term.
As humans, we tend to shy away from uncertainty and instead have a tendency to lean toward people who confidently declare certainty about what will happen in the future. That's why it can be easy to find "experts" who claim they've figured it out or try to predict what will happen in the immediate future. However, the data repeatedly shows that this is a fool's game. The reality is that no one has a crystal ball on what the market will do through the rest of the year.
In this episode, Brandon and Erik discuss this idea and cover:
The characteristics of a long-term investor vs a day-to-day market timer
Some of the core principles to help make sure to capture the long-term market potential returns
The importance of a globally diversified portfolio
What the backbone of most plans should typically be based around
+ Read the Transcript
Erik Averill (00:00):
Hey, everyone. Welcome back to another episode of AWM insights. I'm your host, Erik Averill, and I am joined by my co-host Brandon Averill. Hopefully everyone had a great Memorial day weekend. I know we are excited to jump back into this conversation around investing. And Brandon, where I want to start the conversation today is really around the future. The future of the stock market is we start to open up around the country. I feel like there's a little bit of a potential normalcy, and so there's these signs of hopes of things getting better. So the question a lot of clients and people are asking us is, "Hey, Brandon, what do you think the stock market's going to do going forward?" How would you answer that?
Brandon Averill (00:42):
Well Eric, I think it's going to probably be up double digits for the rest of the year. No, I have no idea and that's the response that I give everybody. And I frankly think that if you're trying to predict the short term returns of the US stock market, or any market for that matter, it's just a dangerous game to play. It's certainly not one that we play.
Brandon Averill (01:04):
But how I truthfully answer that question is more trying to revisit their longterm plan. Let's talk about why you're invested in stocks and bonds and the public markets in the first place. Is it to generate some sort of predictive return in the next 12 months? Hopefully not. That wouldn't be a very good plan to be basing your financial future on.
Brandon Averill (01:26):
So, what I really tried to return people to is let's remember why we're investing. We're trying to participate in the capital markets over the long term. We know that capital markets grow and we build our plans around those. But trying to predict in the short term, I think is a fool's game. And certainly not something that we mess around with.
Erik Averill (01:45):
I think it's good to remember that, right? As humans, the thing is we like predictability. We don't like uncertainty, and so it feels good when we can turn on the TV, and we can hear some of these so-called experts telling us what's going to happen. But I love this quote by Peter Mallouk, an advisor that said, "When we put maybe, and possibly and potentially into the prediction machine this many times, we can only get maybe, possibly, and potentially coming out of it."
Erik Averill (02:18):
I think the point he's saying is, you know what? There's going to be a lot of predictions that want to offer some comfort, but in reality, nobody has a crystal ball. We know this. I think if we've learned anything through COVID is, is information changes every day and points us back to, Brandon, what are the ingredients of being a longterm investor versus a day to day market timer? What are some of the core principles to make sure that we are going to capture the longterm market returns?
Brandon Averill (02:48):
Yeah, Erik. Great question. I think it most fundamentally boils down to participation in capital markets, being diversified globally, not just domestically stocks versus bonds, but really, are you invested in the US, but are you invested in other countries as well? I think in a world where one asset class, so let's take the US gross stocks for instance, are the far and away the best performer for any sustained period of time.
Brandon Averill (03:15):
It's only natural that we all want to dive in, and let's just put a hundred percent of our money in that asset class, because it's doing well because the US is a hub of innovation and we're going to be okay longterm. When we look back at history, that's not always been the case. What we can do is really use diversification, other tools that we know that are within our control to provide the best investment outcome over time.
Brandon Averill (03:44):
When I look back even year to date through April 30th, I think most people would be pretty surprised to hear that the world's in a bit of turmoil right now. That's not the surprise, but people would be surprised to hear that the US hasn't been the best stock market performance year to date. That actually belongs to Sweden followed by South Korea, followed by China, believe it or not. The question then I would pose to you is should we go put a hundred percent of our money in China? It's performed better than the US, and I think any reasonable person would think that would be a silly assumption.
Brandon Averill (04:20):
So it's kind of the same thing with the US. We don't want to take that same approach, and we can look at many different time periods. And some of it is cherry picking some data. But if you, for instance, look at the real returns of stocks from 2000 to 2010, kind of that same concept. We see emerging markets was up 8.3% while the S&P 500 was down 2%. So during that period, and this was happening, people were asking, should we put all of our money in emerging markets? And we know that wouldn't have been a very good decision as well.
Brandon Averill (04:55):
So, the diversification is your only free lunch in investing. It certainly is one of them. And I think that's what a real longterm financial plan should be built upon. What can we expect from a diversified portfolio? Let's not let the highs get too high or the lows too low and build a nice foundation from that.
Erik Averill (05:14):
Yeah, I think even bringing it to something very recent as in last week, specifically in the United States is the S&P 500 has made up a ton of ground. We know that these are the largest 500 companies in the United States, and it can feel like, "Hey, that's where it's safe." And so what happens is a lot of people inside their investment portfolios, whether they're constructing this picking individual stocks, or just the S&P 500, they forget that there are far more companies within the United States besides those 500.
Erik Averill (05:47):
So last week S&P 500 is up 3.2%. That's great, but what we actually saw was the small cap stocks in the United States posted the biggest gains. The Russell 2000 was up over 7%. So even within just the United States, diversification. Really what you want to do is make sure that you have this exposure to all of the companies, so you can capture the market returns, because it's very much that you can't predict which country is going to do the best. You can't really even predict what, what individual company's going to do the best inside of each of those countries. So I think it's really wise.
Erik Averill (06:24):
Brandon, I'd love to just also hear your thoughts, as far as diversifying outside of the traditional just public stock market, are there ways to diversify above and beyond that? Or where does that diversification come in throughout your entire investment?
Brandon Averill (06:40):
Yeah, that's another good question. I think the public market should be the backbone for most investors when they're putting their plan together. It's the most reliable. It's the most predictable from a longterm perspective based on history. And so really making that the core of your plan makes the most sense. Everybody's unique. There are professional investors out there that can tap into the private markets, and maybe you're a real estate professional and you have some more insights there. I think that's on a case by case basis.
Brandon Averill (07:13):
But once you get to the point where you've really solved for that wealth number. That, "Hey, I can do whatever I want to do. What I've accumulated, what's earning for me right now is enough to support the lifestyle that I desire, and that I can take care of my family." Then I think further diversification can come into play in the private markets and certainly provide for a greater expected return over time. So there are ways to do it, but I still think kind of turning back to your public market portfolio as the backbone is the way to go.
Erik Averill (07:48):
That's great advice. And I think I'll leave our listeners just with an analogy that helps me understand the importance of diversification, is a lot of our listeners and people know that our background is sports. And I think about putting together a lineup in baseball, right? You don't just have one type of hitter filling all nine positions. We know that we love home runs, but if one through nine was just trying to go launch angle and hit 50 home runs, but was punching out 200 times a year, it really wouldn't lead for success.
Erik Averill (08:20):
So you can see these individual components where one, one particular company or player is hitting a bunch of home runs. But if the goal is to actually win the game, you want to have a well diversified lineup, right? That's going to give you the best chance to put the most runs on the board. And I think that's the same when it comes to your investment plan. You're not trying to just only hit home runs, right? We're trying to grow our wealth over time in a very diversified, risk adverse way.
Erik Averill (08:46):
And so until next time. We appreciate your guys' attention. We'd love to hear from you any questions that you guys have topics that you would love for us to cover, but until next time, stay humble, stay hungry, and always be a pro.
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