The best parenting advice I ever got was “teenagers are on a roller coaster; don’t get on the roller coaster with them.” Whenever my then-teenagers started going up and down and around the bend, I would envision myself standing on the platform, waving as they went by, and calmly waiting for them when they returned to the starting line.
These days, markets are on a roller coaster, going to steep heights just to plunge again, with many investors acting like they are going around the bend. My advice: Don’t get on the roller coaster with them.
Being a long-term investor does not mean ignoring markets, but rather thinking carefully about one’s portfolio and what the money is for. Based on my experience managing institutional and personal portfolios through the dot com bust, the global financial crisis, and the Covid-19 crisis, I’ve learned (or relearned) three key principles:
Invest in line with your actual timeframe
Many investors have long-term liabilities or stated goals and invest accordingly. Perhaps you are managing a university endowment that is perpetual or a pension plan with 25-year liabilities. Or maybe you are managing your own long-term savings or retirement funds.
The challenge is that you probably don’t really have a 25-year timeframe. Perhaps your real timeframe is the patience of your client or boss, the time to the next election cycle, or your term on a board of directors.
As a personal investor, if you’re young and the money is for retirement (still decades away), you are a long-term investor. But you don’t have that runway if the money is for a down payment on a house or college tuition for your kids in a few years.
You also don’t have a long time horizon if you need liquidity. John Maynard Keynes once said, “Markets can remain irrational longer than you can stay solvent”– a lesson that is important to remember.
The adage of long-term money for long-term goals and short-term money for short-term goals holds true. Do some mental accounting and be sure that the timeframe of your long-term investments lines up with your long-term liabilities or goals.
And also be sure that you have shorter-term investments earmarked for shorter-term goals. A timeframe mismatch is the cause of most financial meltdowns (see Silicon Valley Bank as one of so many examples).
Understand your mission breakpoint
What is the mission of the money you are managing? Let’s say you are managing a university endowment. There is some amount (probably quite a lot) that you could lose without jeopardizing your school’s mission. Your dorms might not be as nice as you would like, or you may not build that new science center, but you will continue to fulfill your mission of educating the next generation.
However, there is a point at which you will jeopardize your mission. Perhaps if you go below some breakpoint, you will default on your debt, have to fire your faculty, or be unable to continue to operate.
If your endowment is $1 billion today, maybe you could go to $500 million and live to fight another day. But if you fall below $500 million, you cannot see a path to recovery. At that point, you jeopardize your mission to educate the next generation – that is your mission breakpoint.
If $500 million is your mission breakpoint, you must protect $500 million of assets – even at the expense of total return. Perhaps you put that money in cash or Treasuries or buy puts. If you cannot cross that line without jeopardizing your mission, you cannot cross that line.
For a personal investor, your mission may be to send your kids to college or to buy a house. Your mission breakpoint is where your kids have to forego their education or you have to rent forever.
Don’t set the line too high. It’s not what hurts; it’s what puts you out of business. Know that breakpoint and don’t ever go beyond it.
“Never let a good crisis go to waste.”
Winston Churchill’s words still apply today. A tough time is the time to do tough things. You probably have a list of things you don’t want to do with your portfolio, but you know you should do.
Maybe you live in a place with many small pension funds; consolidating them into one bigger fund would allow you to hire top teams, diversify your portfolio, or get better terms. Now is a good time to consolidate those funds.
Or maybe you’ve let one position in your portfolio grow to be outsized in terms of risk; trim it. Perhaps you have board members past their prime; encourage them to retire. Or you’ve fallen in love with a stock that doesn’t love you back; let it go. Maybe it’s time to recognize that investment returns will not get you to your long-term goals alone, and you have to start saving more or tighten your belt.
I’ve always loved roller coasters. They give a sense of danger without really being in danger. Adrenaline without real risk. But getting on the roller coaster – with your teenagers or with markets – usually leads to bad decisions and undue angst.
Think carefully about your timeframes, know where your mission breakpoint is, and use this crisis for good. You will be standing on the platform, watching that roller coaster go up and down, and helping others off at the end of the ride.