Resources/Weekly Insights

Volume 14, Edition 9 | March 16 - March 22, 2025

Portfolio Lessons from the Pitch

Doug Walters, CFA

Whether it is in investing in a downturn or defending the goal in a soccer PKs, there is a natural desire to take action. In investing, actions need not be reactive. Instead, evidence-based investors will always be preparing – physically and mentally – for whatever may come.

Contributed by Doug Walters, David Lemire, Max Berkovich, Matthew Johnson

US equity markets narrowly avoided a five-week losing streak. Even though this has so far proved a fairly pedestrian market correction, times like these often prompt the question, “What are we going to do about it?” It’s natural. It is called action bias. If something feels uncomfortable, our brains are programmed with a desire to do something about it. But this question is coming way too late.

Understanding the Origin of the Question

Let’s pause for a minute to revisit action bias. My favorite example is the professional goalkeeper¹. I’ve probably pulled this one out too often… perhaps because I spend my workdays surrounded by two soccer superfans, Dave and Matt… or perhaps because it provides an opportunity to resurface my claim to have played against David Beckham (do you see how I did that? Hah!). Either way, it’s a great example.

A study of professional soccer penalty kicks showed that statistically a goalie’s best chance to save the penalty is to stay put in the center of the goal. Yet goalies rarely do. Action bias! Put yourself in the place of the goalie. How would it feel, with the eyes of the world on you, to stand your ground in the middle of the goal and watch the ball hit the back of the net to your left or right. The fans would not be pleased. Failing, while appearing to do nothing, takes a larger emotional toll than taking visible action and failing… even if the data is on your side.

Investors as Goalies

Returning to today, it is natural for an investor to want to take action when the market is falling. It’s painful. Just as the goalie cannot resist the urge to dive, it feels impossible to sit back and watch your portfolio value decline. Inevitably the question, “What are we going to do about it?” is too tempting to avoid. But the answer is clear… you should have already done it. It’s called preparation.

We always say – we don’t predict, we prepare. There is no telling if the market is going to be up or down this week or this year. But we’re not helpless. There are ways to prepare that are backed by evidence. Diversification, factor investing, opportunistic rebalancing… for starters. We didn’t predict weakness in US equities or the strength in International and Gold this year. But our diversified strategies were ready to take advantage of those market rotations. So, what are we doing about the recent US equity weakness? We’ve already done it.

Beyond Portfolio Preparation

Another type of preparation, equally as important, is mental preparation. Let’s say an investor considers themselves to have a moderately aggressive risk tolerance. We’ll define that loosely as having a 75% allocation to equities. They should be emotionally prepared for years when their portfolio is down 10% and the occasional shock of 20%+ down. That is the reality of investing. Without that risk, the long-term average annual return of 8-10% investors have historically enjoyed would not be possible. They must be willing to take the good with the bad. If the investor can’t stomach that volatility, perhaps their risk tolerance needs to be reassessed.

I recognize that there is a risk, that by talking about the market falling, we are invoking the exact fear we are trying to protect our readers against. So, let’s be clear, recent declines are fairly modest… well within what we would view as normal volatility. But these moments offer a good gut check and excellent training ground to prepare both physically and emotionally for the next real market hiccup.

1. Bar-Eli, Keidar-Levin and Shein, “Action Bias Among Elite Soccer Goalkeepers: The Case of Penalty Kicks,” Journal of Psychology Volume 28, Issue 5: 606-621 (October 2007)

4.5%

Fed Funds Rate

The Fed left rates on hold this week with no change in rate projections.

2.8 %

Fed Core PCE Expectations

The Fed raised its expectations for 2025 inflation as the impact of tariffs remain uncertain.

Headline of the Week

Not All Cuts Are Created Equally

The Fed left interest rates alone continuing their wait and see approach. The latest dot-plot shows that fewer officials see at least two rate cuts this year. The Fed is in a difficult predicament with inflation’s progress towards the 2% target not progressing as hoped, tariffs and other potential policies continuing to keep uncertainty high, and signs of employment weakness at a time of slowing growth. This tough brew could see the Fed cutting interest rates in less-than-ideal circumstances – slowing growth, increasing unemployment. This is a somewhat newer wrinkle to the highly anticipated rate cuts of late. Previously, the rate cutting scenarios were all geared towards sticking the soft landing by removing restrictive monetary policy while maintaining the Fed’s dual mandate. Hard to see a clear path for rates (or the economy) until a few of these uncertainties move at least toward probable.

The Week Ahead

Little in the way of market-moving news next week, at least in the traditional sense. Inflation reports are the main attraction at home, as well as abroad. However, the countdown to Tariff Day on April 2nd will be the major force of market volatility.

Waiting for clarity!

The Personal Consumption Expenditures Index (PCE), the preferred inflation measure of the Central Bank, will come out on Friday.

At the last Federal Reserve meeting the annual target for inflation was adjusted higher, from 2.5% at year end to 2.7%, which should soften the hit from this number.
Expectations are that month-over-month headline inflation will be 0.7% higher in February, versus the 0.2% we experienced in January.
Federal Reserve Chairman Powell said that “we are positioned to wait for greater clarity,” while one inflation print is not going to bring the clarity, it will create fodder for markets.
The Consumer Confidence Index on Tuesday and March Consumer Sentiment Index on Friday will also look at the consumer’s state of mind.
On Thursday we will get a final revision to the fourth quarter Gross Domestic Product, but it is not expected to offer any new developments.
Just as in the States, inflation readings in the U.K., Australia and Japan will be used to speculate on central bank policies in their respective markets.

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