The volatility of the equity markets is the cost incurred to earn higher returns. Once investors accept this it becomes much easier to navigate the ebbs and flows of the markets and allocate capital accordingly.

Time changes the nature of risk. In the short-run stock markets can be extremely volatile and this creates risk for those with short-term time horizons. Over the longer term, however, the volatility is significantly reduced, and markets have consistently yielded positive returns. Proper portfolio diversification ensures that the appropriate amount of capital is allocated to both volatile and non-volatile asset classes and across countries and sectors to ensure investors meet both their long and short-term liquidity needs.

Correlation within asset classes and sectors make it more important for the individual investor to correctly allocate between assets classes and sectors as opposed to picking winning stocks.

The goal for long-term investors is to maintain and grow the purchasing power of their capital, which means earning a positive return after-taxes and inflation. In an interest rate environment where medium and long-term rates are only slightly above (and occasionally below) the rate of inflation, fixed income may not provide a real return for investors.

Market movements are unpredictable and often extreme. The only way for an investor to participate in the market upside is to remain in the stock market; this means not timing the market and accepting volatility. Furthermore, the taxes and cost of attempting to time the market are a drag on returns.

This is the most important consideration for investors and is simply the logical outcome of applying the other fundamentals. Investors must consider liquidity needs and time horizons to determine if it is appropriate to be invested in the markets. Furthermore, investors must consider how an investment impacts the asset allocation and overall portfolio diversification.

Should there be any changes in the Investment Policy Statement? A portfolio should be set up according to an investor’s individual circumstances. Investment Policy Statements should take into account cash needs, risk tolerance and any other relevant factors.

When performance numbers are evaluated it is important to consider the risk associated with those returns. Higher returns are of course desirable, but not if they mean too much risk.

This is crucial. Fees in investment management are often opaque and wrapped up in management expense ratios, load-fees, and commissions. Any good investment advisor should be transparent and forthcoming with what fees are being charged to the account.

A competent advisor should be able to explain why any trading has taken place within the portfolio. Excessive trading or ‘churning’ portfolios is a recipe for high commission, high taxes and low returns.

The ‘efficiency’ of the market in assigning value to securities is a matter of debate, especially at the macro level. What is beyond debate is that outperforming the ‘market’ is extremely difficult, especially in the medium to long-term. Adding value requires experience and a disciplined approach. We would advise investors to be skeptical of any advisor or manager who believes it is easy to consistently beat the market.

Volatility is the hourly, daily, monthly and yearly gyrations in the market. Risk is the permanent loss of purchasing power. The two are very different and should not be confused. Volatility is primarily a risk in the short-term, but actually creates opportunities for investors with long-term time horizons.

Too much focus on income can lead to investors chasing yield and neglecting to evaluate the underlying fundamentals of a given security. The debacle in sub-prime mortgages in 2006-2008 is an extreme example of this phenomenon. A properly constructed portfolio will have balance of income, value, and growth.

We cannot overstate the importance of this issue. The stock market is inherently a volatile place and investors must learn not to let emotions overcome rational investing decisions. Numerous studies, including Dalbar’s influential ‘Quantitative Analysis of Investor Behaviour’, have shown that the biggest mistakes investors make are rooted in emotions.

Material investment returns are accumulated and compounded over time, making short-term performance all but irrelevant. Portfolios should be re-evaluated on a systematic basis or when investor circumstances change; they should not be re-evaluated based on the latest fluctuations in the market or in reaction to a news headline.

Proper diversification is critical to ensuring that investors earn an appropriate return over the medium and long-term.

The day-to-day movements in the markets are simply noise and distract investors from the important decisions such as asset allocation, diversification and protecting the purchasing power of their assets.

Research has shown that the cost and taxes associated with active trading have a material negative impact on returns — so not only does active trading not add value, it subtracts value.

Inflation and rising interest rates can have a material impact on government fixed-income returns, so while the interest payments and return of principal may be ‘guaranteed,’ the preservation of the investor’s purchasing power is not. We see our job as portfolio managers as primarily one of maintaining and growing the purchasing power of invested capital.

Recent history has seen some of the largest companies in the world either go bankrupt or reduced significantly in size. Business fundamentals such as competitive positioning, industry dynamics and balance sheet strength are important regardless of the size of the company.

Proper investing is a rational and methodical exercise. The daily gyrations of the market are simply ‘noise’ that may be interesting or entertaining, but adds little to the process of constructing an appropriate investment portfolio.