Following the recent market turbulence surrounding President Trump’s ‘Liberation Day’ and the imposition of new Tariffs, I received a thought-provoking email from the investment firm Y-Tree. Their perspective was so useful that I wanted to share and expand on some of those ideas with fellow ShareSoc members. As background, you might also find my previous blog on asset allocation helpful.
In our investing lifetimes we will inevitably experience cycles of rising and falling growth, interest rates, and taxation. These cycles lead to periods of deflation, inflation, stagflation, or expansion. Market dislocations, like those we are seeing now, are an inherent feature. Having invested for some years, I’ve seen fear and greed gripping investors at different times.
There is no clear playbook for the current situation, and uncertainty around global GDP, corporate profits, markets, inflation, and interest rates could persist. Some ShareSoc members might, therefore, be considering whether to make significant changes to their investment portfolios in response.
In my opinion, the answer for most long-term investors is NO.
Why ‘Do Nothing’ is Often the Best Strategy
An institutional approach to portfolio construction tends to be designed to navigate periods of uncertainty, even without a crystal ball. Trying to time the market or make drastic shifts based on short-term news is notoriously difficult and often detrimental to long-term returns.
Leading university endowments and charitable foundations, known for their successful long-term investment track records, offer valuable lessons. They tend to outperform individual investors for several reasons, not least because they embrace three key principles:
- Maintain a Long-Term View and Consistent Risk Level: Endowments focus on long-term goals and typically keep their strategic asset allocation and overall risk level consistent. Crucially, they rebalance their portfolios back to target levels, especially during volatile periods. This disciplined approach is diametrically opposed to emotional decision-making, which tends to result in selling low during downturns and buying high during rallies. They also stress-test their portfolios to ensure they can withstand significant market falls while still meeting their essential spending needs.
- Embrace Broad Diversification: They diversify extensively across various asset classes that behave differently in various economic conditions. This might include global equities, government bonds, corporate bonds, inflation-linked bonds, commodities, and gold. Such diversification helps smooth returns over time, as weakness in one area can be offset by strength in another.
- Access Private Markets (Where Appropriate): Endowments often have significant allocations to private markets (private equity, debt, real estate and infrastructure), managed by specialists. These specialists commit capital across different ‘vintages’ (years) and strategies, rather than betting on a single year or manager. Direct access to private market investments is challenging for most individual investors but can be achieved via certain listed investment trusts.
A robust investment approach avoids betting on any single macroeconomic scenario. It aims to weather downturns, potentially take advantage of dislocations (through rebalancing or specific satellite investments), and capture upside when markets revert to the mean.
Since the primary role of our finances is often to fund our life goals, a disciplined, long-term, diversified strategy increases the probability of achieving those aspirations.
Conclusion: Stay the Course
Market turbulence and uncertainty are unnerving, but reacting hastily often leads to poor outcomes. Successful long-term investing, as practiced by many major endowments, relies on discipline: maintaining a long-term perspective, sticking to a suitable risk level, embracing broad diversification across different asset classes, and systematically rebalancing.
While the current headlines about ‘Liberation Day’ and Tariffs might prompt anxiety, for most ShareSoc members invested for the long haul, the likely best approach is to trust your strategy and stay the course.
This blog is written by Cliff Weight, ShareSoc member and member of ShareSoc Education and Policy Committees
This article reflects the opinions of its author and not necessarily those of ShareSoc. Nothing in this article should be taken as financial advice. Financial advice requires a detailed analysis of an individual’s financial affairs and the payment of a fee.
