May Newsletter

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May 2025 Financial Insights Newsletter By Genti Cici, CFP, CAIADate: May 7, 2025 

Our Investment Strategy: Creating Portfolios to Withstand Uncertainty

In our April newsletter, we discussed the volatility surrounding tariffs, their announcements, and their inherent unpredictability. As we move into May 2025, some of the noise has subsided, largely due to potential upcoming trade deals and a more tempered tone from the administration. We continue to advise patience and caution against making unnecessary changes driven by fear or panic. It is often during these uncertain times that investors make the mistake of altering their portfolios without a clear plan for what comes next. For our clients, most have a well-defined strategy that aligns with our core-satellite approach to investing in global markets. In this newsletter, we will elaborate on our investment strategy and its rationale.

We are firm believers in long-term data, which consistently demonstrates that active investing—selecting individual stocks and bonds and engaging in frequent trading—underperforms a strategy of primarily following the index, making fewer trades, and benefiting from the overall upward trajectory of the market. Data from multiple sources, particularly SPIVA by S&P Global, reveals that over time, active investing rarely outperforms a simple indexing strategy. Over the past 15 years, only 10% of large-cap fund managers have surpassed their benchmark index, often by a slim margin, and identifying those managers in advance is exceedingly difficult. Compounding the challenge, even if an investor identifies a successful fund manager, their ability to sustain outperformance over future quarters or years is unlikely.

Given the low probability of consistently beating the market over the long term, our strategy focuses on matching the market through ETFs that track the index, rather than attempting to outperform it. Since only 10% or fewer managers can beat the market—and even fewer maintain that performance—following the index virtually ensures a portfolio ranks in the 90th percentile of all managers without requiring active bets. This index-following approach typically forms the core of our portfolios, accounting for 75-85% of the total allocation. The core provides a foundation that positions us in the top percentile of performance, but we can enhance results further.

Satellites, which are smaller in size than the core, complement the portfolio by adding specific return and risk characteristics that can improve overall performance, enhance diversification, and potentially reduce the portfolio’s total risk. These satellites may include ETFs or individual stocks, depending on the client’s needs, time horizon, and risk tolerance. The core-satellite structure also allows us to incorporate a client’s specific preferences, such as interest in particular stocks or themes, or to express certain convictions held by the advisor.

Beyond constructing a diversified, low-cost portfolio using index-tracking strategies, a skilled advisor adds significant value by ensuring clients adhere to their financial and investment plans. A plan is only effective if followed, particularly when external events create uncertainty. A robust plan anticipates a range of scenarios—positive, negative, or unexpected—and incorporates either proactive measures or, more commonly, guidance on exercising patience to let the market run its course. Typically, a well-crafted plan remains unchanged, and a good advisor supports clients behaviorally by explaining market movements, their historical context, and the mechanics of achieving returns. Returns are not generated by buying high and selling low, yet many investors inadvertently do just that. When instinct urges an exit to avoid the discomfort of a market decline, this is often the worst course of action. Attempting to time the market to avoid “bad days” frequently results in missing the “best days,” which often occur during periods of crisis (see chart below).

If nothing else, a crisis often presents an opportunity for the prudent investor to deploy additional capital, capitalize on market dislocations, or purchase undervalued companies and industries at steep discounts. Alternatively, investors can simply hold steady and allow short-term market fluctuations to subside. Over the long term, the market has always recovered and reached new highs, whether in one year, two, or longer.

During uncertain times, a calm and informed voice is essential to provide education, context, and rational guidance when emotions run high. A skilled advisor, carefully steering clients through periods of panic or exuberance, earns loyalty by fostering discipline, just as clients are rewarded with stronger returns by avoiding impulsive decisions. A financial plan that anticipates various “what-if” scenarios and is discussed thoroughly with the client in advance ensures mental preparedness. Clients understand that market volatility is a normal part of the journey—the price paid for achieving strong long-term returns. As Warren Buffett, now retiring, has famously said: “The stock market is a device for transferring money from the impatient to the patient.” 

Photos Source: Invesco & Bloomberg