Why a Boring Market is Good for Your Portfolio

Usually, change is a good thing. But, when it comes to investing, there’s nothing better than steady markets and boring economies. In the marketplace, boring has a completely different connotation than in other realms.  Boring means little volatility and constant, predictable gains year after year which is a critical component of our client investment strategy.

Every investor likes to believe they can find and invest in the next Google or Facebook. The sheer statistical probability of finding another company that will go from nothing to billions in net worth is minuscule. We don’t bother our clients with theories about the next big thing, rather, we like to invest and keep our portfolios growing year over year using a variety of tools. Seasoned investors understand that every swing doesn’t need to be a home run: You can win a game with a series of solid base hits.

Over the last 30 years, investing has changed and grown in countless different directions. The temptation to utilize every possible new tool that comes out is strong, but many times the risk is not worth the time and energy invested into a particular strategy. There has been a proliferation of alternative investment products, such as investments in private equity and venture capital, financial derivatives, exchange-traded funds (ETFs), real estate investment trusts (REITS), and commodities. Sometimes tried and tested tools work just fine, and many of our clients prefer lower risk investments even if they mean less opportunity for gains.

How Boring Won the Markets in 2013

Source: Wall Street Journal 2013

The Wall Street Journal mentioned so called “dumb money” strategies of buying a bland portfolio of stocks and holding for long stretches of time as the best performing overall investment strategy of 2013. What they failed to mention is that this strategy also outperformed competing strategies for 4 years.

The best performing sectors of the market from 2013 were the Russell 2000, a small-cap stock index representing the bottom 2,000 stocks of the Russell 3,000 and the S&P 500. Simply buying and holding onto stocks during even a modest recovery beat out the market’s latest and greatest timing strategies practiced by hedge funds and retail traders.

The overall lowest performing investment was gold futures, which delivered a shocking -28.2% to investors. This is a sign of confidence returning to the markets. Generally speaking, gold peaks at times when inflation is a high concern and markets lack confidence in the basic financial systems of currency. The end of the Federal Reserve’s bond buying program and the scaling back of quantitative easing are both likely contributing factors in gold’s poor performance this year than in previous years.

While that’s bad news for gold investors and bearish traders, it’s great news for investment firms that rely on more traditional, boring investment strategies.

Are “Dumb Money” Strategies a Winning Formula?

At Carnegie Investment Counsel, we believe firmly that trying to be smarter than the market is the surest way to get burnt by it. Of course, not all alternative investment products are inherently bad. Some of these investment vehicles can provide greater diversification value to investors because they don’t correlate with traditional market instruments and because returns can be determined based on factors independent of market conditions. However, instead of chasing the latest tricks and fanciest investment strategies we can find, we try to invest in the right mix of asset-building strategies that we know have worked for 40 years.

Here are a few reasons why “boring markets” beat out exciting ones for your portfolio 90% of the time:

Boring Stocks Invest Less in Research and Development, Meaning More Profit to Shareholders

It’s not every day that an established company like Nestle completely revolutionizes their candy manufacturing methods. However, it is incredibly common for other industries to be on the cutting edge of technology. They need to devote significant time and money in new research and development to make more money in the long term. This, unfortunately, means less money to you, the shareholder, as capital investments reduce profits. Often times, it remains to be seen whether or not the new technological investment will pay off in the long run.

Boring Stocks Provide Better Long Term Gains

According to Nardin Baker at the Management firm of Guggenheim Partners, from 1990 to 2012 a portfolio consisting of the 10 percent of stocks with the lowest volatility on the market did 19 percent better per year than a portfolio consisting of the 10 percent of stocks with the highest percent of volatility. The least risky stocks beat the most risky stocks over a 22 year period of time hands down.

The name — low volatility strategies – refers to the outcome. These strategies offer investors a way to invest in equities with lower overall volatility than traditional equity portfolios that are benchmarked against a market-capitalization index. “Plan sponsors have to take risk, but as little as possible while controlling cost,” says Nardin Baker, Managing Director at Guggenheim Partners Asset Management. “Stocks that help offset their liabilities are as close to a free lunch as exists in the investing world.” But there isn’t just one way for an investor to use these strategies. Fortunately, there’s more than one way for investors to use these strategies and to construct a low volatility portfolio.

-The Low Volatility Anomaly. (2011). Pensions & Investments, 10.

Boring Markets Are Less Stressful and Won’t Keep You Up At Night

If you want fun and excitement, go hang gliding, ride roller coasters or spend some time traveling. If you want to invest wisely, go for boring, predictable stocks in a similar market and you are sure to keep your stress level low. This reduces the chance of backing out of investing decisions due to the ebb and flow of the market, and makes your long term gains a lot better.  Not to mention, it produces fewer grey hairs, as well!