Dog Days


  • Summer fun, Olympics, and politics have moved to the forefront of the news cycle

  • After a snapback rally from Brexit concerns, markets generally drifted in late July

  • Importance of staying invested while alert for price-related or fundamental opportunities


Summer Doldrums

Early in July many asset classes moved strongly higher as market concerns over Brexit receded and related volatility declined. Rising prices were aided by expectations for Central Bank interest rate increases being pushed farther into the future. In the last couple weeks of the month, markets drifted upward with low volume and a marked lack of enthusiasm. In our view, this is due to the lack of immediate catalysts for market moves and is aided by the typical summer reduction in activity.

Contrarian Reasons for Optimism

According to a July poll conducted by Reuters, global fund managers recently reduced their equity holdings to the lowest levels and raised their bond holdings to the highest levels in more than five years. This level of uncertainty and negativity regarding the future prospects for global stock returns is generally a positive sign for long term investors. Remember, asset prices are only low when the average investor is not enthusiastic about owning them. We want to deploy capital during times like these with an eye toward expected gains to be harvested when optimism inevitably returns.

Repricing vs Growth

The price of a stock is simply an amount agreed upon by buyers and sellers of a future stream of income generated by a particular portion of a certain company. For the price to go up either:

  1. The future stream of income increases (growth) 
  2. The price paid for the future income increases (repricing)

Investors would prefer growth to be the main source of our gains since it represents sustainable and often repeatable gains. Unfortunately, growth has been very low for several years while decreasing interest rates has meant that investors are paying a higher and higher price for yield, dividends, income, and profits. Asset accumulators should be excited to see low prices, and higher interest rates while asset sellers would obviously prefer the opposite.

The Most Important Thing

The most important thing in long term investment success is to stay invested for long periods of time. Trite, but worth remembering. Staying invested to a meaningful degree regardless of short term fluctuations, or even long term valuation concerns, means that gains can continue to compound and that big up days and weeks won’t be missed. These short periods of market surges tend to erupt almost randomly except for being more likely when bearishness if high. The following chart, compiled by Business Insider and attributed to JP Morgan Asset Management shows that missing just 10 of the best days over 20 years can almost cut returns in half over even that lengthy period:

It is difficult to underestimate the importance of staying invested with a consistent approach through both optimistic times and pessimistic times. Our investing strategy is centered around controlling risk to a degree that allows us to maintain investments under all market conditions. Even when we feel that there is an elevated risk of pullbacks or even bear markets, we want to keep a “mostly invested” stance.

Portfolio Strategy

It shouldn’t come as a surprise that investors prefer what they are comfortable with. This is a form of bias that often works against their long term return and risk management goals. The following chart from The Vanguard Group shows and excellent example of a type of “familiarity bias”:

This graphic tells us that investors tend to hold substantially more of their portfolio assets in companies listed in their home country than a global broadly diversified market cap index would call for. This is true Canadian investors, for British investors, for Australian investors and for Japanese investors as well as for American investors.

There are mathematical reasons for wanting proper diversification. Spreading investments over various types and locations of assets improves long term risk/return ratios. Interestingly, this logical conclusion isn’t followed by most investors and serves as an excellent example of what “seems” or “feels” right to us humans is often not rationally optimal. 

We are willing to deploy assets against this natural home bias. At the moment, international stock investments can be purchased at an attractive valuation amidst a generally more negative sentiment than exists for domestic stocks. While this persists, we’ll continue to tilt our portfolios accordingly.

Our allocation strategy is designed to deal with a wide range of short term market events, such as recent periods of market turbulence. While it may seem boring, far more often than not, the best move once invested is to simply sit tight. Warren Buffet, considered by many to be the greatest investor in history, has said that “An investor should act as though he had a lifetime decision card with just twenty punches on it”. Of course the number twenty is arbitrary, but obviously Buffett does not recommend trading action just for the sake of action. We’ll remain vigilant for opportunities, and in the meantime can remain quite content with the ongoing compounding of the investments we own.

SVANE CAPITAL, LLC IS A REGISTERED INVESTMENT ADVISER. INFORMATION PRESENTED IS FOR EDUCATIONAL PURPOSES ONLY AND DOES NOT INTEND TO MAKE AN OFFER OR SOLICITATION FOR THE SALE OR PURCHASE OF ANY SPECIFIC SECURITIES, INVESTMENTS, OR INVESTMENT STRATEGIES. PAST PERFORMANCE IS NOT AN INDICATION OF FUTURE PERFORMANCE. INVESTMENTS INVOLVE RISK AND UNLESS OTHERWISE STATED, ARE NOT GUARANTEED. ALTHOUGH BOND FUNDS MAY PAY HIGHER YIELDS THAN OTHER FIXED INCOME INVESTMENTS IT DOES NOT NEGATE THE FACT THAT THE MARKET VALUE OF ALL BONDS FLUCTUATE DUE TO INTEREST RATE MOVEMENTS AND OTHER FACTORS. INTERNATIONAL INVESTING INVOLVES SPECIAL RISKS INCLUDING THE POSSIBILITY OF SUBSTANTIAL VOLATILITY DUE TO CURRENCY FLUCTUATIONS AND POLITICAL UNCERTAINTIES. IN INVESTMENT CONCENTRATED IN SECTORS AND INDUSTRIES MAY INVOLVE GRATER RISK THAN A MORE DIVERSIFIED INVESTMENT. THERE IS NO ASSURANCE THAT A DIVERSIFIED PORTFOLIO WILL PRODUCE BETTER RETURNS THAN AN UNDIVERSIFIED PORTFOLIO, NOR DOES DIVERSIFICATION ASSURE AGAINST MARKET LOSS. ANY GRAPH PRESENTED CANNOT IN AND OF ITSELF BE USED AS THE SOLE DETERMINANT IN MAKING AN INVESTMENT DECISION. GRAPHS ARE HISTORICAL DEPICTIONS AND HAVE INHERENT LIMITATIONS IN MAKING INVESTMENT DECISIONS AND CANNOT PREDICT THE FUTURE RESULTS OF ANY INVESTMENT. BE SURE TO FIRST CONSULT WITH A QUALIFIED FINANCIAL ADVISER AND/OR TAX PROFESSIONAL BEFORE IMPLEMENTING ANY STRATEGY DISCUSSED HEREIN.