This year’s extreme volatility has kept investors on edge, but market veteran Howard Marks believes that none of the short-term risks should matter. Oaktree Capital Management’s Marks penned a memo to his clients this week, urging them to ignore the ups and downs in asset prices in the short run. His memos have gained a wide following on Wall Street, and even legendary investor Warren Buffett has said he reads them regularly and always learns something from them. “Investors should find a way to keep their hands off their portfolios most of the time,” Marks said in the memo. “Macro events and the ups and downs of companies’ near-term fortunes are unpredictable and not necessarily indicative of — or relevant to — companies’ long-term prospects. So little attention should be paid to them.” The market has been in turmoil in 2022 as the Federal Reserve deployed a series of aggressive interest rate hikes in an effort to bring down inflation running around its highest levels since the early 1980s. Many fear the tightening could tip the economy, still recovering from the pandemic, into a recession. The S & P 500 has fallen nearly 16% this year. The 76-year-old investor believes the price swings are influenced far more by changes in investor psychology than by companies’ long-term prospects. “Because swings in psychology matter more in the near term than changes in fundamentals — and are so hard to predict — most short-term trading is a waste of time … or worse,” he wrote. Marks said investors put far more importance on volatility than they should, quoting Buffett’s comment: “We prefer a lumpy 15% return to a smooth 12% return.” “Investors who’d rather have the reverse — who find a smooth 12% preferable to a lumpy 15% — should ask themselves whether their aversion to volatility is mostly financial or mostly emotional,” Marks said. Long-term performance matters Marks said what really matters is the performance of investors’ holdings over the next five years at a minimum and how the value compares to the initial investments. He said investors should hold on to their securities as long as the company’s earnings outlook and the attractiveness of the price remain intact. Buffett has long recommended that investors put their money in low-cost index funds that track the broader market. “Consistently buy an S & P 500 low-cost index fund,” Buffett said in 2017. “Keep buying it through thick and thin, and especially through thin.” Marks noted that the S & P 500 has notched a 10.5% yearly return since 1926 even through 16 recessions, one Great Depression, several wars and a global pandemic. “Think of participating in the long-term performance of the average as the main event and the active efforts to improve on it as ’embroidery around the edges,'” Marks wrote.
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