The Rule of Two
Looking back on the first year of Investment Insights.
Marketers have created something called the Rule of Seven. A brand must interact with the customer seven times before purchase, or so it goes. In that same spirit, this column shares key investment insights from the past year. Ideally, repetition will help readers “buy in” to these ideas. Call it the Rule of Two. Also, a recap is easier for your author during an otherwise busy holiday season.
January detailed the new era facing financial markets, one with higher interest rates and without overt central bank support. When confronting such uncertainty, the optimal stance is balance and flexibility. Better to perform more-or-less decently across a wide range of scenarios than brilliantly in any one at the risk of doing poorly in all others. Preserving the ability to adjust as events unfold is vitally important.
The inaugural Investment Insights also began with a brief statement of purpose (the first six paragraphs). It sets a nice tone for all that has followed and is worth rereading in full.
February was an abstract discussion about investing. Fundamentally, investing is delaying gratification and embracing discomfort. Each requires overriding deep-seated behavioral tendencies. We evolved in an environment of scarcity, not the present abundance, creating a physiological bias toward immediate consumption. Pain was always to be avoided, yet growth requires its voluntary acceptance. Long-term success comes only through higher understanding of these concepts.
March was about what we might learn from Silicon Valley Bank’s failure. Relevant lessons are to 1) manage your liquidity carefully, 2) use leverage appropriately, 3) diversify properly and 4) invest only in what you understand. Better to learn these vicariously than firsthand.
April was a short case study on attention. The research is clear: we don’t notice things that we are not actively looking for. Identifying and understanding risks is essential to building long-term wealth. Only a deliberate, risk-first approach – protect, then build, wealth – can succeed.
May offered a nuanced perspective on volatility. Volatility is not only a risk, as conventionally accepted, but also an opportunity for those prepared. Understanding this distinction and structuring your financial affairs accordingly will work to your advantage over time. If you remember only one thing from this column, it should be this.
June was a deep dive into compounding. Compounding is one of the most important concepts for building wealth, yet its tremendous long-term power is difficult for humans to fully understand. Those who do, and position themselves to take advantage, stand to reap the rewards. If you only remember one more thing from this column, it should be this.
July tied together volatility and compounding with asset allocation. The true purpose of asset allocation is to simultaneously minimize the negative aspects of volatility and maximize the chances of achieving long-term compounding. Achieving this requires a comprehensive approach tailored to your unique financial situation and liquidity needs. This approach, which I call the “stack,” differs from many conventional methods.
August was a timely examination of the impact of rising long-term interest rate expectations. Fears of higher future rates caused a ~10% market selloff through late October, while hopes for lower rates spurred a subsequent ~13% (and counting) rally. Think of interest rates as the price of economic activity. Raise them and you get less economic activity and, consequently, lower asset prices. Lower them and you get the reverse. Note that shifts in expectations, rather than changes to the actual rate itself, are all that is necessary.
September was a fun little tangent detailing Vinfast Auto’s brief time as the third most valuable automaker in the world. This illusion resulted from a confluence of fundamental and social forces affecting tick-by-tick marginal supply and demand. Irrational things like this will always happen. Now you know why. More importantly, you now know just to ignore them.
October tackled an interesting paradox. To financial markets, sometimes good news is bad and sometimes bad news is good. Markets predict the future. Rather than respond to what happened, markets act on how what happened changes expectations for what will happen going forward. This creates a lot of volatility, which you can mostly ignore while protecting and building wealth.
November concentrated on diversification. The prevailing ideology – diversification good, concentration bad – is largely correct but lacks nuance. Diversify, but do only the right amount, correctly and for the right reasons. Think rather than obey. Concentration can be beneficial in the right situations. Long-term success almost seems to require this.
That’s a wrap for Investment Insights season one. I hope you found it entertaining and, well, insightful. I’m proud of what I’ve written and how I’ve written it. My goal is to make year two even better. Let me know if there is something you would like to read about in a future column. Until then, go and be with your family and loved ones. I wish you and yours the happiest of holidays! See you in 2024!
Thoughts? I would love to hear them. Email me at email@example.com.
Written By Keith R. Schicker, CFA
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