Back to School

It’s that time of year that kids hate and parents love. It’s back to school time. Time for the kids to get back to a routine, back to a schedule. Back to discipline. I find that when they’re home over the summer, or over long breaks from school (Christmas Break, Spring Break…) they tend to lose a bit of discipline and ambition. They need the structure of the school week to keep them in line.

I think investors could benefit from the same. After a couple of months without much direction or discipline, the US financial markets seemed to show a lack of direction and motivation. Back and forth. Like a kid sitting on the couch watching “The Price is Right” all summer: no direction.

Now with school ready to resume, hopes are that we see a return of investors showing some conviction. With that, it would be nice to see a return of some direction in the equities and fixed income markets.

I’ve always been a preacher of disciplined investing. One of the principle values I provide my clients as an advisor is helping them establish a disciplined strategy. At times, we face pressures in the financial markets that cause stress placed on the client’s discipline. It’s my duty to keep the client focused on the bigger picture, on the end goal, and on the broader strategy.

When we have an extended period of time of a direction-less market (like we’ve had this summer), some clients can tend to start questioning the strategy. In times like this, I start getting calls from clients wondering, “I’m not going anywhere. I’m right where I was 3 months ago.” It happens. I always revisit discussions around our strategy and remind them that we expected these things. Most clients have short-term memories. And most clients want constant instant gratification.

But investing in the financial markets does not work that way. If you consider the long-term performance history of the US equities markets, represented by the S&P 500 index, we’ve seen average annual returns of approximately 10% (9.62%) over the past 25 years. But that’s an average. Over the past 25 years, we’ve seen 5 down years, 20 up years. We’ve seen returns of less than 10.0%, 10 years and greater than 10.0% 15 years. The best year produced 37.58% (1995) and the worst year -37.0% (2008).

It would be nice if we could make 10% per year, every year. It would be nice if we could make 0.833% per month (10% divided by 12 months) every month. But investing in the financial markets does not work that way. This is why we need to stay disciplined. This is why it is important to develop a strategy and stick with it. To participate in the 9.62% average annual performance of the S&P 500 over the past 25 years, you would have to be invested in the S&P 500 (or some proxy thereof) during the entirety of that time period. You could not get on and get off when it doesn’t seem like the train is moving as quickly as you’d like. If you were on a flight from Los Angeles to New York and you hit a little turbulence, you would not jump off and abandon your travel strategy. Doing so might leave you stranded somewhere in Kansas or Missouri.

My kids go back to school next week. My hope is that the markets will return to form very soon as well. It’s always my goal to keep clients disciplined. But its also a desire to see my kids more disciplined and ambitious. I’ve just learned to expect that summertime behavior at home is a little different for my kids. I try to fight it, but I really just hope to contain it.