Investment Rules to Live By

By Michael Carlisle on March 5, 2020

Michael Carlisle
Fear of the inevitable global economic impact from the spread of the Coronavirus drove fixed income yields to record lows to close out February trading. Equity markets experienced their worst weekly decline since October 2008 and the velocity of last week’s equity market decline represented the fastest 10% correction in U.S. history.

As we have previously noted, given recent market valuations along with recent slowing global growth and demand, last week’s market declines aren't surprising. They are quite rational. However, the speed and magnitude of the market’s move last week was in fact amazing. With markets having traded to all-time highs, it is reasonable to expect higher levels of market volatility as investors now digest new doses of uncertainty. In fact, at the time of this statement, markets are about to close out on history again as the Dow is set to post its biggest single day point gain ever. Now folks, that's exactly what we mean when we talk about volatility! 

At the Trust Company, as we have been telegraphing, we have gone back to our roots and we have seized upon current events as an opportunity to rebalance client accounts. In 2019, our Investment Committee made the decision to over-weight US Large Cap Equity relative to its strategic long-term target. This tactical allocation has proven a profitable move for our clients. Given our relative over allocation to US Large Cap Equity along with current valuation, we have elected to adjust portfolios to neutral weightings.

As such, we have taken profits primarily from US Large Cap Equities along with profits from our core bond holdings. This move results in near-term fluctuation of cash levels with the primary trend of re-investing profits by putting cash back to work across US Small Cap Equities. We also note the long-term attractiveness Non-US equities exhibit relative to US equities. However, given current market conditions, we have opted to remain underweight foreign equities for now.

During tumultuous times in equity markets, it’s reassuring to be reminded of some foundational investing "rules to live by".  They appear rather simple, yet they are powerful, and successful long-term investors understand and embrace them.


It’s time in the marketnot market timing.  You must invest and then stick with your investment plan. Time is an investor’s friend. Failing to earn a compound return on capital is riskier than not investing at all. Yes, capital markets have risk, but avoiding that risk is also costly.    


Self-Control.  Warren Buffett’s mentor, Benjamin Graham, said, “the investor’s chief problem―and even his worst enemy―is likely to be himself.”  There is probably nothing that benefits an investor more than learning self-control. Irrational behavior can quickly wreck your plans to accumulate wealth. Simply put, don’t be impulsive.  


Diversification.  For an investor, diversification is the closest thing there is to a “free lunch”.  It does not guarantee that portfolios will not experience loss of value from time to time, but it does protect from systemic concentrated risk. Keep it simple by rationally investing between cash, stocks and bonds, allowing these "uncorrelated" asset classes to reduce overall portfolio risk.   


Reversion to the Mean.  This is a powerful statistical force that every investor should learn to respect. In the short term, capital markets can be irrational and trend to excess, but they eventually revert to their historical means. Be very careful not to fall for “this time it’s different”.  If it looks and acts like a bubble, it probably is. And remember―super performers in any given year often revert to underperformers shortly thereafter.  


Ugly markets are a real investor’s friend.  One of Warren Buffett’s famous quotes is, “be greedy when others are fearful and fearful when others are greedy.”  Use market drawdowns to keep or add to your security positions. Learn to manage greed and fear. Yes, stocks are risky, so is avoiding them.


Keep costs low.  Real investment returns are net of costs, taxes and inflation.  Minimize the compounding of expenses so the power of compounding returns can work its long-term magic.