CIO Insights: Macro Events in a Micro World

Macro events in a micro world

Podcast


We hear all the time from investors beset with worries—The Fed. China. Brexit. The economy. Oil. The election.1 And these are just the highlights. Confronted with these uncertainties, we see anxious investors contemplating abandoning their financial plan and moving entirely to cash. Some even cite this old investment adage—sell in May and go away.

How much easier our lives would be if a coherent investment plan could be summed up in a simplistic rhyme scheme! Fortunately, we know that a well-thought-out saving and investing plan has far more to do with individual investment success than do these macro events.

Micro (Individual) Decisions Drive Investing Success

For any long-horizon investment goal, say funding retirement or college costs, the key determinant of investing success is how much you save. Period. China and the Fed never enter into the equation. Your ultimate financial success is largely down to your own (micro) decisions and has little to do with macro factors like the United Kingdom’s decision to leave the European Union, or who wins the next presidential election. Study after study show this to be the true.

Asset returns, and by extension your asset allocation (your mix of stocks, bonds, and cash), are other important determinants of financial outcomes. The good news is that your asset allocation can be determined in advance, with a plan for gradual de-risking over time.

To summarize—the keys to an investor’s financial success come down to creating and sticking to a saving and investing plan. This is the furthest thing possible from selling in May, or selling in response to anxiety about events half a world away.

When Making a Change Makes Sense

There are, however, times when it makes sense to change your allocation, but usually these changes have less to do with market movements or macro factors and more to do with where you are in your own life, and how close you are to your financial goal.

Consider retirement—the larger your account balance and closer you are to your retirement date, the more it makes sense to reduce risk. This is because you are nearing the end of contributions to your account and will have the longest time in retirement to finance. In those circumstances, it makes sense to reduce risk because a sizable market downturn could cost you years in retirement distributions.

Another situation in which it makes sense to adjust your portfolio in response to market movements is to rebalance it. Rebalancing refers to the process of selling winning assets and buying underperforming asset classes in order to return to your predetermined asset targets.

Consider the extreme case of the 2008-09 Financial Crisis. Then, stocks had historically poor returns while Treasury bonds produced some of their best results ever. To rebalance to your stated asset allocation targets, you would be selling bonds after a historic rally and buying stocks after a historic sell-off.

There are a few clear lessons to draw here. The first is that rebalancing enforces a sell-high/buy-low discipline, and the second is that it points to the benefits of making decisions in a structured way with buys and sells around a core position determined by your own financial goals and risk tolerance. This is vastly superior to abandoning a saving and investing plan for a simplistic rhyme scheme.

At American Century Investments, our investment teams manage portfolios from bottom-up stock selection perspective and do not make top-down decisions in response to macroeconomic events.

Learn more about this process and Our Views on the Brexit Vote.

¹The Fed refers to the U.S. Federal Reserve. Brexit refers to the exit of the United Kingdom (Britain) from the European Union.

Rebalancing allows you to keep your asset allocation in line with your goals. It does not guarantee investment returns and does not eliminate risk.

The opinions expressed are those of Scott Wittman, CFA, CAIA, and are no guarantee of the future performance of any American Century Investments portfolio.

For educational use only. This information is not intended to serve as investment advice. Past performance is no guarantee of future results.