VF View – 2nd Quarter 2021

Let me share a secret.  This investing thing is not hard!  Time, not timing, is the secret to creating wealth.  But did you also know that the markets are cyclical?  Sometimes the big companies do well.  Other times small companies do better.  Sometimes technology firms do well.  Sometimes financials.  What about companies based in the great United State of America vs. overseas? 

When we were having client meetings last summer and fall, we were telling clients how much of a disconnect there was between how well US large growth companies were doing versus the US small value companies.  We were seeing price differences of over 40%, so we were buying US small value companies!  Since then, US small cap value stocks have come roaring back!  Does that mean that we had early access to this July 8th article in the Wall Street Journal all the way back in August last year? 

I wish!  The reality is that given enough time, nearly all investment categories will go in and out of favor.  So why do investors always seem to want to buy what is hot right now?  Don’t worry, it is part of our human psyche.  Recency bias says that people tend to give more importance to things that have happened in the short term. 

Recency bias is only one reason (but a big one) that the average investor gets less than a 3% annual return!  A study done by Dalbar shows that the average investor had a return of 2.9% (orange bar) primarily from buying sectors that had done well and selling sectors that had underperformed. 

So where are the current cyclical disconnects?  We believe them to be in international stocks.  We are now at over 13 years where domestic investments have outperformed their international counterparts. Does this mean that we are taking all money out of US stocks and putting them overseas?  Absolutely not!  Does this mean that we are going to take some of our winnings from the sectors that have done well (see first article) and shift them slowly to international sectors that have not done as well?  Absolutely! 

As we head into the second half of 2021 and continue to reach new highs, keep in mind that we will see a pull back in stocks.  It is not a question of “if” but rather a question of “when.”  When that time comes, be aware of your recency bias.  Buy things that are on sale and don’t be an average investor!  If you have any questions, please do not hesitate to reach out to your VF advisors.