Microscope, Telescope, or Kaleidoscope

Microscope, Telescope, or Kaleidoscope

Can I say I love this blog even before I write it?  Well, what the heck, I love this blog, and let’s see if I can manifest it into being.  Here is the basis, as I have this conversation quite a bit with clients.  The question is how far they should be looking in advance for their investments? 

Now, there are a lot of things to consider and reasons to “look into the future” when it pertains to your investment portfolio.  The two main questions are when you should be adjusting your portfolio for the next stage of life, and how far in advance you should be predicting what happens in the markets.  For this piece, I’m going to really focus on the latter. 

Let me set up the concept with a for instance.  I’ll have this general type of question from clients, I don’t know, like 10 times a week.  The question goes something like this. 

“Andrew, I’ve been doing a lot of reading, and I’m getting nervous about the data and what I’m seeing.  They are predicting xyz in data, and all signs point to a recession looming.”  You get the gist, as it is generally some version of “I’ve been reading/listening/seeing and then some validation or predictive statement of ‘how will this impact my investments, and/or should we be doing anything different based on this data?”

Now comes the question to synthesize: what is the right framework when taking in data and your investment portfolio?  I think it is helpful to preface with a common assumption.  The markets generally are valuing the next 6 months of data.  That is the loose industry standard that the markets are pricing in today. What will they predict over the next 2 quarters?  I always liked the old Benjamin Graham quote of “in the short run, the market is a voting machine, but in the long run, it is a weighing machine.”  Basically, short-term markets trade on more emotion, but long-term, they trade on underlying fundamentals and financials. 

I believe there are 3 lenses to use when viewing markets and economic data: a microscope, a telescope, or a kaleidoscope.  Let me expound on them and my take.

Microscope:

For starters, we have the microscope investor.  This is the person who reacts to every piece of news that is out there, good or bad.  They are risk on or risk off on a whim and make rash decisions based on emotion and the most recent data.  To me, this is the worst kind of investor, as not only is there no true investment thesis, but they are running on emotion and not logic.  If they were running on logic, they would quickly realize that there is way too much data and unpredictability in the markets to jump at the beck and call of the most recent news piece or economic data.  There is so much nuance and unpredictability that this investor is always left chasing and basically defines buy high, sell low (yes, I said that correctly for this individual).  Needless to say, I’ve found almost zero long-term success when approaching the markets with a microscope.

Kaleidoscope:

Ok, for starters, when was the last time you used a kaleidoscope?  How fun and trippy were they back in the day?  I used to love playing with them for about 30 seconds.  Come to think of it, why the heck were they even invented, as I can’t really think of a viable use case for more than 30 seconds of entertainment.  Now, what does a kaleidoscope investor look like?  Truthfully, the opposite of the microscope investor.  This person lives by the mantra of paralysis by analysis.  There is too much data out there, and they view it through a jumbled mess lens.  They are basically incapable of making any decisions for fear that they are making the wrong one.  I’ll hear this person say, I’m waiting for the next sell-off to invest (of which they never invest when they come).  Or they have an obscene amount of money sitting in cash out of confusion or lack of clarity.  Finally, I’ll see their 401(k)’s invested fully in some target date fund and literally never look at it again.  The point being, this type of investor is their own worst enemy and truly needs help to get out of their own way.

Telescope:

That leaves us with the trusty telescope.  Be honest, did you own one growing up, thinking you’d look at the planets and comets on the regular to literally have it collect dust next to your Bowflex?  Perhaps you are like my best friend, who literally became an astrophysicist and stares at the universe on a daily basis.  Regardless, the telescope is a powerful tool and is used to make something that is literally millions of light-years away seem like it is right in front of your face.  Now, this is the exact type of investor I believe we should all strive to be, and the investor, in my opinion, that performs the best long term.  They are steady and continually keep the long view.  They make decisions not based on what happens tomorrow but on long-term trends and the future.  They realize markets go up and down unpredictably, so they don’t sweat the small stuff.  Telescope investors keep their eye on the prize and simply don’t sweat the small stuff.  These individuals tend to allow the markets to run their course and simply understand that they go up and down, so they simply don’t panic.  It doesn’t sound sexy and can be very painful at times, requiring trust and faith, but I truly believe that this is the winning strategy.

I see you!

Regardless of the type of investor you are, there is always time to adjust and change the lens through which you view the markets, your portfolio, and economic data.  I also truly believe a great financial professional like my colleagues here at Diversified, LLC can help adjust your lens for success.

As always, stay wealthy, healthy, and happy.