Keep Pushing the Investment Flywheel
Contributed by Doug Walters, Max Berkovich, David Lemire,
This past week our leadership team took a couple of days out of the week for our annual planning meeting. I always look forward to these sessions. It is an opportunity to step out of the day-to-day work “in” the business to focus “on” the business. We often talk about the flywheel concept, and it struck me how relevant this concept is for investors.
The flywheel was an analogy popularized by Jim Collins in his book “Good to Great.” It is this idea that it is challenging to grow a business at first. It is like a stubbornly heavy flywheel at rest. But with consistent small pushes in the right direction, a business can build momentum over time until one day they find their growth is inevitable and exponential. Looking back, there is not one action that has led to this success, but rather many pushes over time in the right direction.
Investors can learn something from this analogy. For a lucky few, wealth has come in one fell swoop. For most, though, wealth is a long journey. For these investors, the flywheel is a great analogy. At first, the flywheel of wealth is stubborn. You are contributing to your investment account and investing wisely but not seeing much in the way of results for your efforts. The goal of financial independence seems a long way off.
But the beauty of investing is that returns compound. 10% return on $100,000 this year is $10,000. Now you have $110,000. 10% on that is $11,000. In other words, with consistent pushes in the right direction, your investments will grow exponentially. Progress may seem limited at first, but as long as you keep pushing the flywheel in the right direction, your assets can start to do the hard work for you… as long as you keep pushing in the right direction.
What would be a push in the wrong direction? Examples include:
- Market-timing (jumping in and out of the market based on speculation),
- Chasing the hope of high returns in risky investments (hedge funds, crypto, high-growth stocks),
- Under-diversifying (e.g., too much home bias),
- Generally, believing that spotting the next big thing in investing is the key to your success.
These pushes could be in the wrong direction and have the potential to slow down or even stop the flywheel. Our evidence-based approach is designed to consistently provide the flywheel with little pushes in the right direction. Whether it is putting proven factors at the core or opportunistic rebalancing, every action is designed to give the flywheel a little nudge until your investments are doing all of the hard work for you.
The headline this week is more about the small print. Headlines get all the attention, especially those with big unexpected numbers, like last week’s job report and continuing tech layoffs. However, it is often later in the story (8th, 9th, or even 15th paragraphs) that the most meaningful information can be found. In this case, some of the more interesting insights were not only buried deep in the story, but the story came out a week after the original headline.
Last week’s employment report showed eye-popping gains. This number coming out just prior to the Fed’s most recent meeting added an extra sizzle to the headline. Fast forward another week, the Wall Street Journal offered an interesting take on some of the underlying aspects of the current employment picture that has the potential to influence inflation, the Fed’s rate path, and how markets move.
Some sectors of the economy saw massive overhiring during the pandemic. Conversely, some sectors saw massive downsizing. Both areas could be normalizing; think Peloton layoffs and restaurant hiring as illustrative examples. Last week’s jobs report revealed normalization in those areas hit hardest by the pandemic. No doubt, many folks were enticed back into the job market by higher wages. But, if understaffed firms can fill positions more easily, it could prevent more drastic steps that could accelerate a wage/price spiral. Needless to say, the soft landing still requires much work, but big, bold headlines don’t always tell the full story.
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