Choppy markets are tricky for long-term investors. You need to stick with the game plan, ride out temporary downswings, bury your emotions. But investors also can’t simply ignore the here and now. Russia is at war with Ukraine, gas prices have soared, and the Federal Reserve is going to aggressively raise interest rates and tighten monetary policy to combat the kind of inflation the U.S. hasn’t seen in decades. High prices and high rates may lead to an economic recession. These are all meaningful events that will impact markets and many companies for months or years to come.

The solution: The best investors do both — maintain a long view while also focusing on the shorter term. While those two focal points may seem diametrically opposed and difficult to juggle, balancing them is, in fact, the key to navigating volatile markets.

Here are some strategies to help you get into the proper mindset.

Barbell Approach

We want to discuss the concept of a barbell portfolio. If you know weight lifting, you know a barbell has two sides of equal weights. That's how you want to structure your portfolio, having two opposite sides of equal weight. We can think the opposite sides in terms of economic sensitivity and duration.

• Economic sensitivity refers to the impact the strength of the economy will have on earnings. While all companies are inherently tied to the economy — given that the flow of capital is interconnected — some businesses are far more sensitive than others.

• Duration refers to how far out we have to look before any earnings become material. This may also be reflected in a higher valuation multiple. The further out the earnings are — and therefore the more we have to discount them to get to a present day value — the “longer duration” the stock is.

We’re not going to have a perfectly clean barbell — because economic sensitivity and valuation multiples don’t have a perfectly consistent correlation. However, what we will attempt do is provide some food for thought that we hope will help members maintain their longer-term views while sharpening their ability to focus on shorter-term dynamics.

For the sake of this exercise, let’s consider one end of the barbell to be the “long-term view,” and on the other the “short-term focus.” Doing this will help us better think through which names are more deserving of our attention right here, right now, and which ones we can manage more passively.

Long-term view stocks

First the long-term view: These stocks will be the more passively managed names and identifying them is what will free us up to focus on those that require more active management.

On this side of the barbell is where you’re going to place those secular growth names. These stocks have shown an ability to execute and grow through any environment but don’t usually see an outsized earnings boost when the economy heats up. 

We might put names like Alphabet (GOOGL), Amazon (AMZN), Salesforce (CRM), Nvidia (NVDA) and Apple (AAPL). These stocks are going to be among the more passively managed ones when the market environment becomes more difficult to navigate. While we’re still monitoring key events, in the short-term the market is going to apply some volatility but we believe that longer term, these profitable companies — key word here is profitable — will all continue to see earnings grow regardless of what the near term brings.

• Google-parent Alphabet will continue to gain share in cloud, advertising activity will continue to move away from print and linear television toward direct targeting and YouTube.

• Amazon will also benefit from cloud adoption, a growing ad business and the ongoing shift toward e-commerce.

• Salesforce will keeping growing as companies increase information technology investments to compete with rivals.

• Apple will keep selling the single most important consumer device in the world — the smartphone — while growing its services’ revenue streams, generating monstrous free cash flows and buying back shares.

• The heart of everything from cloud to cars to gaming and graphics will continue to be Nvidia, with its cutting edge hardware and rapidly growing suite of software.

The stocks of these companies have taken a hit as price-to-earnings multiples contract. For the most part, however, none has seen underlying fundamentals deteriorate. As a result, the long-term view beats the near-term dynamics. Therefore, we can accept some pain here. Rather than ask ourselves what to do with them on daily basis, we’ll take a more passive approach. They aren’t bad names and our long-term view remains very bullish. They simply don’t have their upside levered to the economy the way an oil company might. In some cases, such as with Amazon and Salesforce, higher multiples have kept some investors away.

We’ll keep our eyes on these stocks, adding to our positions on pullbacks and and rebuy shares we sold at higher prices. On the flip side, we can trim our positions should we feel greedy or need to raise some cash. We’ll still monitor the earnings calls and conferences, read the industry notes and look out for newcomers, but we don’t have to sit there constantly questioning our position, wondering when the music will end. In our view, the music in these names will keep playing for years, even decades to come.

Consider our purchase of Alphabet shares. During periods of market turmoil, we want to circle the wagons around the highest quality companies at attractive valuations, knowing that even if we aren’t going to nail a bottom, longer-term we can rest pretty well assured that we will see higher levels than our purchase price. Put another way, we aren’t going after speculative names in this environment, we need the stocks of companies that as a result of their financial standing and revenue resilience are ultimately in control of their own destiny.

Year to date, the stock has, on decent volume, seen support come in four times around $2,500 per share. During that time, the company also put out a fantastic earnings release, which came on Feb. 1 after the closing along with an announce of a 20-for-1 stock split and a $10 billion share buyback. The stock gapped up from $2700 before the news, to $3000 the day after, but completely closed the gap in the next couple days. We view such round-trip towards the $2700 price level as a good opportunity to get into the stock. With the earnings serving to confirm our long-term view, we took a shot at around the $2,700 level.

With our long-term view supported on a fundamentally strong quarterly update, we bought at a level we haven’t seen in roughly nine months. We’re done for now. We’ll let this one do its thing knowing that other than looking for a new lower level to maybe nibble at, this position has been addressed and does not need daily attention.

Short-term focus stocks

By taking this more passive approach on a handful of names, we free ourselves up to think more critically about the names that do require more attention. These could be problematic positions we need to monitor and manage on a daily basis — such as our Wells Fargo (WFC), Devon (DVN), Chevron (CVX), Boeing (BA), Ford Motors (F) holdings. These are names we discuss daily and monitor like hawks, even if we’re not constantly trading them. Some are names that are going to move on every macroeconomic reading, oil price swing, Covid lockdown, or update on Russia’s invasion of Ukraine. In other words, these are economically sensitive industrials, financials and energy names. We may not be taking action in these “short-term focus” names every single trading day but they do require more attention.

For example, a more tense situation in Russia? Higher oil prices? That’s Chevron and Devon. While a move away from foreign energy should certainly provide a longer-term headwind, we have to acknowledge that a geopolitical premium has worked its way into commodity prices and as tensions hopefully ease, that premium will come out. There’s also an increased risk that a misstep by the Federal Reserve can push the economy into recession. This would hit energy demand and have an outsized impact on energy names. Again, a recession is not our base case but it is a risk that has increased given the Fed’s need to aggressively adjust policy to curb inflation.

In the end, unlike say Alphabet, which is tied to secular growth trends such as cloud computing, targeted advertisements, online shopping, autonomous driving, and artificial intelligence in general, an energy name like Chevron and Devon are tied to commodity prices. As a result, while they are certainly going to be in the driver’s seat during an economic boom, as commodity prices rise, they are more likely to be standing in the middle of the road, ready to get runover when the cycle goes against you. The same thing goes with economically sensitive sectors such as financials and industrials.

Bottom line

Whether you are a full-time portfolio manager or an amateur investor, your time is limited. By identifying and separating names with unchanged long-term views from those more highly leveraged to current events, you can better manage your time.

Consider our rule of thumb: For every position, you want to allocate one hour per week for homework. If you can identify the longer-term view names, you can perhaps whittle that down to 25 minutes per week — we’re talking five minutes per day to check price levels and conduct a quick Google search for news updates — and allocate the other 35 minutes to more thoroughly researching and thinking through the short-term focus names.

This is exactly how we do it managing multiple portfolios. We don’t discuss what we think of Alphabet each day. That would be a waste of time. We already know. Instead, we spend the bulk of our time discussing names leveraged to the current environment. We look at how that backdrop may shift in the near term and how we can best address problem positions. We look to build positions when warranted and to trim when the opportunity cost may simply be too great.