As we've emphasized over the years, our global, value-based investment approach demands a multi-year timeframe. We often cite 7-10 years as the appropriate period to think about when planning or assessing returns. Such a strategy requires patience, and there are a couple of main risks that can challenge one's ability to stay the course.1 - Volatility Risk
This describes how much an account's value changes over shorter periods. If volatility is too high for comfort, one might abandon the long-term approach due to a short-term market decline. We know that there will be inevitable and sizable swings in the markets. (Over the last few days we've been tested on that front too). But by placing our clients into portfolios designed to experience a personally acceptable range of volatility risk, we've done our best to minimize the chance that our clients will experience an intolerable swing. This is something that we've been careful to address and are happy to re-address with you anytime.2 - Risk of "Tracking Difference"
Another and much less discussed risk that has been noticeable lately is what we're going to call "Tracking Difference" — the potential difference in returns between your portfolio and the US stock market.
The US media mainly focuses on the domestic stock market, so that's what most US investors tend to be most aware of. The returns of the bond markets and international stock markets are often just an afterthought, if that. This is kind of strange, as the GDP of the rest of the world is twice the size of the US, and the international stock and global bond markets together are many times the size of the US stock market. But that's the way it is.
The result is that if a US-based investor's portfolio returns track too differently from the US markets, it can come as a surprise. That can lead to a lack of confidence and even the abandonment of a long-term approach. (read more)