Incorrectly Thinking the End Has Arrived

Despite being told why financial markets behave the way they do by those supposedly in the know, markets are unpredictable and often random.

February 2, 2018, may be recorded in the annals of stock market history as the day for the beginning of the end.

Jeff Cox reported, “Major indexes tumbled that day, with the Dow industrials shedding an ominous 666 points or 2.5 percent. Bond yields jumped, with the 10-year Treasury note hitting a four-year high. Things only get worse the following Monday. On that day, the market would see the first of two 1,000-point-plus drops." How did you feel experiencing the market whiplash and what occurred the following Monday morning? Watching huge market drops and not knowing what was still to transpire.

Depending on which stock market guru you followed, the opinions expressed may have varied from the end is near to just another market correction. Scott MacKillop astutely reported, “Their explanations about why the market took a sudden dip are no more valuable than their prophecies about how the markets or the economy will perform in a given year."

What Was The Best Asset Class?

Ben Carlson, CFA blogged in January 2018, “To give you an idea, here are the nine-year annualized returns: Investors who pick their holdings based exclusively on past performance are going be in heaven when they see these results which will likely lead to disappointment for many." If anything made the case for having a diversified portfolio, the first two weeks of February should have been your awakening.

Miller and Lu reported on the same day the market decided to have its hiccup, “The S&P 500’s 22 percent total return last year was its highest since 2013 … Still, investors would have gotten better total returns in 21 other markets, with Argentina, Turkey, Vietnam and Nigeria leading the world — each delivering more than 50 percent.” Who would have ever thought emerging markets would beat the S&P 500?

Here again, not knowing how any one market or class of investments will do again solidifies the importance of diversification of assets. Allocating investments across different asset classes may help lessen some risk and increase the potential opportunity for market gain. Despite the continuous bombardment of often conflicting financial information, decisions should be made for appropriate action steps to participate in the market. There are many financial investments to consider and research. The ability to invest in a wide swath of financial products is good for the investor.

Avoiding Mistakes

Mistakes often occur when investors begin thinking they can beat the market because of a prior good market return. Worse, a prior bad decision requiring making up losses by taking increased risks. Financial professionals would agree there is some commonality in thinking when investing in any financial market.

Importantly, have a plan and know your timeline and goals when investing. Obviously, if needing capital quickly or in less than a year to a few months, investing in short-term marketable securities should be considered. As your timeline broadens, a portfolio should be constructed taking advantage of different asset classes, each which can be accessed when needed to fit your requirements.

Despite being told why financial markets behave the way they do by those supposedly in the know, markets are unpredictable and often random. There is no way to know which asset class will be the next winner or loser until after the yearly data is analyzed. There is an expectation that an active manager should beat the market benchmark return. Unfortunately, the reported data prove this is woefully near impossible. In any given year, there may be managers who beat the benchmark for an asset class. However, it is nearly impossible for them to repeat this two years in a row.

Markets Are Unpredictable

Tom Anderson wrote, “Analysts found that active fund managers who outperform their benchmark in one year struggle to get similar gains in the following years … The results were bleak for professional stock pickers. Only five percent of mutual funds that invest in large U.S. companies that had a winning three-year record against the S&P 500 continued to beat their benchmark in the three following year."

Ryan Poirier a Senior Analyst for S&P Dow Jones Indices recently reported, “The results are in for the latest S&P Persistence Scorecard. Based on data as of Sept. 30, 2017, the results again highlight the lack of performance persistence among actively managed equity funds … Of the 222 large-cap managers that were in the top quartile as of September 2013, zero could retain this mark for the subsequent four periods. Similarly, for mid- and small-cap managers, within their respective starting universes, no manager was able to maintain their performance."

What Is An Investor To Do?

All investments have a risk-reward (returns) scenario and should be carefully evaluated by an investor and with their specific concerns, personal or family circumstances and perceived risk tolerance in mind. Having a respect for financial markets with their inherent movements — wild to relatively calm — and not trying to time when to get into or out of the market ultimately boils down to developing a plan.

Being mindful of the importance of diversification, your needs and related time frames, not getting spooked by the markets up and down cycles may help an investor become more comfortable in knowing that good or bad events do not last indefinitely. Remember, research has shown that investors who consult with a trusted fiduciary advisor, i.e. CFP professional, may have a better time of minimizing the psychological angst of market gyrations and its related stress, thereby avoiding making a bad and potentially costly decision.

Note: The information contained in this article is for educational and informational purposes only. It should not be construed as financial advice or methodology to be used in analyzing, developing or constructing a portfolio or entering into any financial investment or endeavor. Professional advice from an advisor of your choosing should be considered before agreeing to any financial purchase, trade, sale or activity with the addition of proper and thorough research with adequate vetting performed.