We are sending you a mid monthly update as you might be wondering how your Triple Partners investments have been affected by the recent turmoil in the financial markets. At the time of writing, the Core Portfolio is down around six percent since the beginning of August. Slightly less than our benchmark, but since we passively invest a material part of the Core Portfolio in the global stock markets, we also took a hit.[ref]With data from “Home bias in foreign investment decisions” – Journal of International Business Studies, August 2009 and “Investment Madness”, by John Nofsinger, 2011.[/ref] As co-investors in the Core Portfolio we have suffered with you and understand a loss like this can be painful.
These events might also lead you to wonder again why we are investing ‘passively’? We all saw this downturn coming didn’t we, so why not adjust the portfolio in anticipation? Things always look so logical after the fact.[ref]This ingrained behavioral trait is called ‘hindsight bias’.[/ref]But are they really? Let’s look at the current chain of events:
In the last weeks of July, investors around the world were indeed anxious. The US congress was locked in a bitter and partisan debate over raising the debt ceiling before the deadline on August 1st. It seemed like no agreement could be reached and doom and gloom was predicted for the stock markets by central bankers, economists and politicians alike. When Democrats and Republicans came to an agreement during the weekend before the deadline, investors worldwide, at least those who had not bet on a downturn, breathed a big sigh of relief. Alas, as we know now, what followed after an initial rise on that first day of August was the worst week since the collapse of Lehman Brothers. Investors who had made the right prediction of the political outcome, still lost money, as the stock markets’ reaction was the opposite of what you would expect.
A week later analysts blamed the continued stock markets’ nosedive on the S&P downgrade of US government debt. A downgrade after all implied that a default by the United States government was no longer just a theoretical possibility. The effect of this downgrade? Investors started buying more US government bonds. Long-term US interest rates went down and the value of the US dollar increased against currencies like the euro and the Swiss franc. Again, the opposite of what most people would expect.
To come back to the question: why not try to anticipate the short-term whims of the market? Because we cannot predict future events, and even if we could, chances are we would get the effect on the stock markets wrong.
What we do try to do is build a portfolio based on solid investment principles that have stood the test of time and which has a good chance of providing attractive long-term inflation adjusted returns under a wide range of different scenarios. Unfortunately short-term volatility is a necessary evil that we need to accept to attain this goal.
That’s why we insist you only invest in the Core Portfolio if you have a long-term investment horizon and are not a net consumer of that portion of your wealth for the coming years. If you are a saver and decide to invest periodically, the good news is that today you can buy practically the same portfolio as last month at a lower price. Maybe that thought can bring a bit of consolation.
Should you have any questions, please do not hesitate to contact us.
Warm regards, and lots of investment peace of mind,
Marius Kerdel and Jolmer Schukken