The financial markets are not so unlike many other aspects of life. There are events that you can control and those you cannot. News headlines in the most recent quarter once again make this humbling point. Geopolitical risk demonstrated through the violence in Syria, gridlock politics hampering the legislative process seen during the US government shutdown, or monetary policy impacts on financial markets evidenced by the Federal Reserve decision not to taper are all illustrations of forces beyond an investor’s influence that must still be incorporated into portfolio construction and decision making.
Clichés are often used because they have the ring of truth. An example is that investing draws many parallels to sports. In both activities, there are talented participants, seasoned commentators, and statistics that shape a team’s game plan. On game day, the players take the field and become subject to the pressures put forth by the other team, the field conditions, the referees, and even themselves. The team that consistently rises above is the one that focuses within and filters out the noise. It is the team that best adapts their strengths to the many influences outside their control that sees success.
In today’s investing world, we find ourselves again at the turning point of so many economic situations, many of which are out of our control. It is likely that the US Federal Reserve will be the first central bank to start withdrawing its extraordinary support in the coming years and we are likely to see rising interest rates in the long term. Japan continues to push forward on its own policies and has seen a tremendous shift in the value of its currency relative to those of its neighbors. Europe has reduced the stress on its most vulnerable members, but still seeks resolution of its economic unity and long-term structural issues. Emerging markets are coping with the need for a more self-sustaining and self-funding growth path. Future news headlines will certainly continue to redirect our short-term focus.
In the face of these outside influences, we must focus on what we know – that valuation is the guide to good returns. As investors, we can exert our control by being selective in the assets we own. By having a plan yet staying flexible, we will be able to find the path to our long-term investment goals.