Perennial Wisdom
“Someone's sitting in the shade today because someone planted a tree a long time ago.”- Warren Buffet.
Compare growing and preserving wealth to growing and caring for an oak tree. Once you plant an oak tree, it takes years to grow and generations to preserve, but they can provide shelter for hundreds of years and the opportunity to build something grand. The same goes for wealth. It takes years to accumulate, and preserving wealth takes generations. You can apply many lessons from oak trees to life and wealth management. Much of our philosophy derives from these lessons, and lessons from the following:
Markets Reward the Long-term Investor
The current annualized compound return for value stocks has been 12.9% for 2019. In contrast, the annualized compound return for growth stocks has been 16.3%. (1) It clear to say value stocks have underperformed growth stocks over the past decade. Despite the change in numbers, there is a big lesson to be learned about the two's past performance.
How do the returns for value and growth stocks over the past decade compare with their long-term averages?
Growth's annualized compound return of 16.4% over the 10-year period ending June 2019 was much higher than its return since July 1926, at 9.7%. On the other hand, value stock's performance over the past decade has been more or less, but on the same line as its historical average 12.9% today and 12.7% in 1926. Value stocks have performed similarly to how it has historically behaved. In other words, we can expect the market to do what it does best.
Awarded the Nobel Prize for his work on portfolio theory, economist Eugene Francis “Gene” Fama’s theory states, the stock market will return an average of 8% per year. In other words, the value of an investment portfolio has the potential to double every nine years.
It’s unlikely to predict or time the market, but as a long-term investor with patience and discipline during the good and bad times, you can expect the likelihood of long-term success.
Goal-Oriented
Your financial plan and investment strategy must be consistent with your overall financial situation. Take the time to reflect, weigh your options, and make appropriate decisions that best fit you. An ideal plan that you don't feel right about will do you no good. The key to any sound financial plan or investment philosophy is one that you can stick with it.
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Value stocks' performance is measured by the Fama/French US Value Research Index. Growth stocks' performance in measured by the Fama/French US Growth Research Index.
Academic Historical Investment Research
No one has control over interest rates, inflation, or the financial markets, but you do have control over your actions and behavior. Rather than attempting to predict the future or outguess others, we draw information about expected returns from the market itself—leveraging the collective knowledge of millions of buyers and sellers as they set security prices. By trusting markets to do what they do best—drive information into prices—frees us to spend time where we believe we have an advantage, namely in how we interpret the research, how we design and manage portfolios, and how we service clients. We take a less subjective, more systematic approach to investing
No Pressure
Our team will never lure you into investments impractical to your goals, make recommendations that benefit us over you, or "sell" you a product to earn a larger commission. You should never risk your investment decisions, and you should never feel pressured either.
If you are willing to follow this path, your oak tree will grow from a small sapling to a majestic towering tree, the whole time giving back air, shade, and beauty. It will go on to do this for your generation and the next.
All investing involves risk and strategies such as asset allocation and diversification. It will not guarantee a profit or protect against loss. Rebalancing may be a taxable event. Before you take any specific action, please consult with your tax professional.
Disclosure: All investing involves risk, including the possible loss of principal. There is no assurance that any investment strategy will be successful. The views stated in this piece are not necessarily the opinion of Cetera Advisor Networks LLC and should not be construed directly or indirectly as an offer to buy or sell any securities. Due to volatility within the markets mentioned, opinions are subject to change without notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. Past performance does not guarantee future results.
Here are a few realities about investing.
Growing an oak tree doesn't happen overnight, and you can't rush a tree to make it grow faster.
If you are constantly chasing the newest investment ideas, you may miss out on time spent growing your investment.
Doing daily inspections, and worrying about your tree, won't make it grow any faster either.
Constantly checking the markets and worrying about what "might happen" is no way to live. A good advisor will have you focused on your goals and not the markets.
Uprooting your tree and storing it in the garage over winter because you are worried about the "bad weather" will make it difficult for the roots to replant when the winds shift.
Selling all your investments and switching to cash because you're worried about the economy puts you in a difficult situation when trying to enter back into the market. You could miss out on future potential returns when the economy improves.
Falling leaves in the winter season do not mean your tree is dying.
When the market inevitably corrects, and we enter a Recession, stick with your financial plan. In the end, the markets will clear up giving your investment opportunity room to grow.
Giving your oak tree enough room, enough light, enough water, and enough time will help it grow into the oak tree you always pictured.
Key tools for growing your wealth is an initial investment, a broadly diversified portfolio of stocks and bonds, and time to let your investment grow.
Entrust your oak tree to someone with a green thumb to help you give your tree periodic pruning and fertilizer.
The only upkeep your investments need is rebalancing and occasional additions of new investments or moving of investments. Find a financial advisor that will put your interests first.
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