Investing Beyond the Calendar

“New year, new luck,” as the saying goes. Usually because the past year did not offer quite enough of it. Fair enough, there’s always room for more.

When it comes to investing, however, we should not place too much emphasis on the calendar year. It is ultimately an arbitrary cutoff, and just a few days later the picture of the past twelve months can already look entirely different.
That said, the turn of the year cannot be ignored altogether.

When incentives meet time horizons

The annual cycle influences the behavior of management teams just as much as that of professional investors. This has to do with incentive structures such as bonus payments, target agreements, and stock option plans – mechanisms that genuinely follow an annual rhythm and shape the decisions of both management and investors.

Those who invest in equities, however, operate on a very different timeline. Positive developments are not realized year after year; instead, they typically build on one another. That is the essence of long-term investing: benefiting from compound interest over extended periods of time. Only then does linear growth turn into exponential growth.

Seen this way, year-end is nothing more than an interlude in a marathon that never truly ends.

Strategic decisions instead of constant first-principle debates

Rather than repeatedly asking whether and to what extent one should hold equities, it is far more constructive to define a strategic target allocation – either in absolute terms or as a percentage of total wealth. People differ widely in how they approach this. But with sufficient investable capital, having no equities at all strikes me as a mistake.

Because equities often appear complex and unpredictable from the outside, it takes a first step to understand how they actually work.

Even for investors who are highly sensitive to volatility, I advocate an equity allocation of at least 10% of liquid assets. Not as a promise of returns, but as a way of opening the door. Interestingly, such a modest allocation can even reduce the overall volatility of a pure bond portfolio. The reason is that bonds and equities often move differently.

But I am probably preaching to the converted. Most of our clients come to Gutmann precisely because they want a solid equity component in their portfolios. And as an investment house, that is exactly what we stand for.