The gale-force of the most recent market mayhem is now three calendar quarters long (see Trendlines). Investors and advisors have been rattled by the enormity of the negative numbers.

We continue to believe in four fundamental precepts:

  1. Successful long term investing is goal-oriented and therefore planning-driven. The absence of having a Plan is therefore incongruous with success. A portfolio is not a Plan, it is the means to a Plan.
  2. The Plan prescribes an asset allocation strategy across different investment classes.
  3. Portfolio management calls for diversification of the “things” in each of those classes.
  4. Portfolio management calls for periodic rebalancing across, and within, investment classes in order to respond to market developments.

These are all quantitatively monitored by a collection of reporting systems we maintain for each account, all of which are communicated to you in your Annual Report. Judgment is attached to those quantitative inputs in our assessment of economic conditions.

The most important statistic in your Annual Report is the long term compound return, because this is the lighthouse for your Plan. The long term impact of a very bad year can be seen in the impact it has on your long term compound statistic. The more years (and market conditions) included in that statistic, the more relevant it is. It is also inferential for you in the Annual Report to read the one year and term-to-maturity returns of the fixed-return component of your portfolio. This is the tree to hug in the economic tsunami.

This kind of market will test an investor’s mettle. Fundamental behaviours are necessary to survive such times:

  1. Faith in the future. An inherently-pessimistic nature will not make a good investor.
  2. Ignore the Press. Journalism can make a pessimist out of almost anyone by promoting the apocalypse-du-jour, and any data can be cherry-picked to support that scenario.
  3. Patience is the highest virtue. Patience is the decision not to do something wrong. Your Plan, and accompanying asset allocation plan, can provably achieve your long term goals. It cannot, and should not, be judged for any interim shorter period. How you react to severe market declines is the truest test of your patience and abilities as an investor.