Investors needn’t another layer of uncertainty, but received one anyway over the weekend after a meeting of members of the Organization of the Petroleum Exporting Countries (OPEC) and its partner countries (together OPEC+) collapsed. Saudi Arabia slashed prices and matched threats from Russia to increase production. Meantime, COVID-19 cases surged in the U.S. and in Europe, with sovereign and local governments implementing increasingly strict measures to contain the spread. With global growth already suffering from coronavirus pressures, contagion took on another meaning as investors began to worry about an oil sector-driven credit crisis. Risk markets tanked around the world as U.S. Treasuries soaked up that anxiety. When we wrote in last month’s commentary that we always should be expecting the unexpected, we didn’t think we’d find so soon such a stark example.

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It would seem that investors finally began to focus on the near-to-medium-term potential impact of the COVID-19 virus. Or, was it that the Democratic Party debates were stirring fears of an increasingly tumultuous progression to the 2020 Presidential Election? We might best assume both, even as we respond to the recent dramatic decline in the equity markets by staying the course. That is, to the extent that we always should expect the unexpected as part of the investment process, the longer-term plans we have set before such events likely need not be altered.

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We closed January’s commentary with the thought that the vagaries of market returns we see in history are likely to persist in the future. While we cannot foresee what shall become of the market over the longer-term future, we can plan to be adaptable to circumstances in the interim. In particular as we begin to withdraw more than we save in our investment portfolios, we may need to balance the longevity of our savings against levels of spending. One also may wish to de-risk portfolios through time as sensitivity to market volatility rises. An advisor can help clients establish and implement plans that take into consideration such details and, over time, assist in digesting new information, altering existing plans where necessary.

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One might suggest any hesitancy to be exposed to investment risk at the end of the third quarter proved misplaced, as returns for Q4 2019 show green most places one looks. Then again, one might in response state that misplaced is a poor choice of words, with premature perhaps a better qualifier as relevant risks remain reasonably elevated as we head into 2020. Such is the natural push/pull of acknowledging the past and gauging proper expectations for the future. Our perspective? As always, there are reasons to be both cautious and optimistic. Depending, of course, on individual preference for each.

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Last month, we discussed the highly variable magnitude of investment outcomes over longer periods of time. The focus was on the accumulation phase of our investment lifetimes, or those years when we tend to be saving much more than we are spending. Markets may prove just as variable when we begin to spend our invested savings, while the fact that we have begun to subtract from invested monies adds a further complication to the math. This month, we want to focus on that math, hoping to provide a bit more perspective for discussions related to the longevity of investment portfolios.

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Investment hypotheticals are imaginary scenarios of portfolio returns. Summaries of theoretical past or future circumstances, they may serve as powerful tools for instruction, in particular we think when the goal is as much to convey how the investment math works as it is to convey the results of that math. Helping folks think through the arithmetic of retirement planning is one such effort for which we think examples of and discussions over such what-ifs can be truly impactful. Starting with the “accumulation” phase of investment, this month’s commentary is the first in a three-part series we’ll pen to illustrate that math.

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Depending on how one defines the group, Value stocks have underperformed Growth stocks for a decade or longer. This potential for long periods of underperformance is one of the primary reasons that we “tilt” our portfolios toward Value, while also incorporating multiple factors into the stock selection process. Value’s underperformance, nonetheless, does not dampen our preference for increased exposure to less-expensive stocks. The underperformance has coincided with an expanding valuation gap between Value and Growth stocks. We find that trend bolsters both the premise of our preference for Value and our belief that forward returns may benefit from favoritism toward stocks that have been left behind in this latest market surge.

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The third quarter was tense in manners similar to the thrilling, but otherwise inconsequential subplots forced into the hurtling-toward-a-super-bad-outcome narrative of a typical disaster movie. This year’s trade scrap is just one round of many past and likely future struggles that the U.S. will experience as it seeks to come to terms with an ever-surging China. It seems obvious from the market data that investors have eyed the contest closely. But global growth was slowing anyway. As nations seek to deal with a range of long-term growth-sapping pressures, the third quarter presented a fresh reminder to stay observant of the underlying plot, even as exciting side stories may draw attention elsewhere. In the same way, we wish to remind readers that the “plot” on which to focus when it comes to investing revolves around short- and long-term financial goals. Best to leave the otherwise weakly relevant subplots on the cutting room floor.

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Seems like each day brings a new call that a recession is right around the corner. Or, if not right around the corner, somewhere in the nearer-term future. If not so soon, then likely at some point over the next few years. Or perhaps later. Of course, one of those statements must be true. As always, the timing of that recession is up to the universe to decide. And where timing is considered, we generally caution against shifting target portfolio exposures in light of any “pending” recession. We find the most defensible approach is one that sticks to target allocation that accommodates comfort with the potential market-related ramifications of macroeconomic downturns, while remaining focused on longer-term plans.

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Normally we’re not big fans of the phrase, as it’s often used reflexively rather than with specific intent. On the contrary, we reference relativity often and with specific intent. For example, we regularly remind readers that expectations for greater relative return should be accompanied by expectations for greater risk. This month, we offer perspective on the historical relative returns of a range of mixtures of equity and fixed income using the benchmarks we utilize for our portfolios as the basis for comparisons. The goal of the review is to further support the process of defining client comfort with exposure to market risk and to provide a means to establish reasonable expectations for short- and long-term outcomes.

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