I’m very disciplined. I can resist anything except temptation.” – Oscar Wilde
Last year at this time, we wrote about how you can choose what to focus on when reflecting on calendar year performance. 2022 had been a horrible showing with stocks falling into a bear market (driven by the “magnificent seven” stocks, down an average of -45.2%). Bonds were not far behind, reaching an intra-year low of -17% and ending the year down -13%¹. Those headlines dominated the narrative, with many proclaiming the “death” of the balanced portfolio (often referred to as the “60/40” due to target weightings in stocks/bonds).
Then on Jan 2nd, 2023, The Wall Street Journal published an article with the headline: “Big Banks Predict Recession, Fed Pivot in 2023.” The article predicted that higher interest rates would push unemployment levels above 5% and consumers would be forced to pull back on spending while inflation remained high. So, we wrote about gratitude and the importance of having the right perspective as an investor. It was intended to be a behavioral coaching and general educational piece about staying disciplined and sticking with your plan over the long run.
Today, we find ourselves pondering a related question: “What is discipline really?” Here’s an excerpt from Chat GPT’s answer to that question:
“Overall, discipline is the cornerstone of success in various aspects of life, whether it's achieving personal goals, excelling in a profession, mastering a skill, or maintaining healthy relationships. It's a blend of self-control, dedication, consistency, and a mindset geared towards progress and improvement.”
We agree with the basic premise: achieving long term goals requires self-control, dedication, and consistency. And who can argue with the idea of a growth mindset? However, when it comes to investing, the idea of continuous improvement often interferes with success. The concept implies you must do something different given changing circumstances.
This was evident in early 2023 when many were tempted by savings account yields of ~5%. “If I can earn 5% in cash, why would I invest in stocks and bonds?” and “What’s the harm in waiting for the economy to improve before we put our cash to work in the market?” were common questions that we were asked and addressing.
For many investors (and even some advisors) it was a challenging situation to navigate given the overwhelming doom and gloom coming from virtually every expert, pundit, and publication. We found ourselves referencing Warren Buffet’s classic line: “Be greedy when others are fearful, and fearful when others and greedy”.
Those who followed the “Oracle of Omaha’s” playbook were rewarded. Over the full 2023 calendar year, the S&P 500 index total return was ~26%, developed international stocks were up ~18%, and emerging markets stocks posted gains of ~10%, all amidst the turmoil of two horrific wars. What about those shunned bonds after the 2022 market rout? The broad US bond index was up ~6%. The often criticized and frequently doubted portfolio of 60% global stocks and 40% bonds returned ~15% in 2023. Stocks and bonds handily outperformed cash, and bonds outpaced inflation for the first time in several years.²
What lessons can we take from the unexpected 2023 results? Furthermore, how do these lessons help answer our question to ChatGPT – “What is discipline really?”
Of all people, Bruce Lee can provide some wisdom here with his quote: "It's not the daily increase but daily decrease. Hack away at the unessential." From an investment perspective, the unessential items that are hardest to “hack away” at include:
The sense that someone, somewhere has insight into what “smart investors” should be doing today – often based on the latest themes, technology, or innovation. The global economy and financial markets are far too complex to allow any person, organization, or AI model to accurately predict the future in our opinion, informed by experience and research on available data and historical results. Technology innovations (including AI) may help reduce the time it takes to digest vast amounts of information and agree on fair prices, which should broadly benefit markets and investors overall, but success at timing and/or predicting markets remains elusive.
The feeling of euphoria during positive market years and the feeling of fear when portfolios don’t perform in line with expectations. Try shifting from “how has my portfolio performed over the last year or two?” to “am I positioned to get the best results over the next couple of decades, or over my time horizon (investing lifetime)?”
A worldview summarized as “I don’t have any control over the global economy or markets so my ability to achieve my financial goals is out of my control.” Every investor has control over some of the most important determinants of long-term financial success: the portion of income set aside for saving and investing; the amount of risk, and higher expected return, to take on with invested assets; education, career, and lifestyle choices; and, in many cases, the timing of decisions around major purchases.
Successful long-term investors focus on a few especially important principles and are disciplined in staying the course with their plan, regardless of whether the predominant forecasts are for “doom and gloom” or “sunshine and rainbows”. We focus on preparing for the future, rather than predicting it.
Investing is a lifelong endeavor that rewards those who take control of what they can and patiently let the fluctuating global capital markets compound wealth. We feel honored to be the trusted adviser on this journey with you.
Wishing you a 2024 filled with health, happiness, and time with the people who matter the most to you.
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1. Magnificent 7 companies: Apple, Microsoft, Amazon, Alphabet, NVIDIA, Meta, and Tesla. Individual stock returns sources: Dimensional & Bloomberg. Bond return source: JP Morgan Asset Management.
2. Source: Dimensional Fund Advisors. Developed international stocks, emerging markets stocks, US bonds, and inflation represented by MSCI World ex USA Index, MSCI Emerging Markets Index, Bloomberg US Aggregate Bond Index, and US CPI, respectively.
Past performance is not a guarantee of future results. Index performance does not reflect the expenses associated with the management of an actual portfolio. Index returns reflect all items of income, gain and loss and the reinvestment of dividends and other income.
Client portfolios may or may not hold the bond funds listed above for the referenced time period. Actual client performance may be lower or higher than the performance data quoted. Performance data provided by fund manager. Returns less than one year are not annualized. Consult your WWP performance report or WWP Client Portal for more detail.
Waypoint Wealth Partners (WWP) is a Registered Investment Adviser with the U.S. Securities & Exchange Commission. Registration does not imply a certain level of skill or training. The information provided is for informational purposes only and should not be construed as investment advice or a determination that a particular product or service is suitable for any individual. This information should not be relied upon in making an investment decision.
The information represents the views of WWP at a specific point in time and is based on information believed to be reliable. No representation or warranty is made concerning the accuracy of any data compiled herein. In addition, there can be no guarantee that any projection, forecast or opinion in this material will be realized. Any statement nonfactual in nature constitutes only current opinion which is subject to change. Any reference to a security listed herein does not constitute a recommendation to buy, sell or hold such security. Past performance is no guarantee of future results. Any tax and estate planning information offered by WWP is general in nature. It is provided for informational purposes only and should not be construed as legal or tax advice. Always consult an attorney or tax professional regarding your specific legal or tax situation.
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