It’s the time of year again here in investment land where you’re trying to make sense of the year just passed while also trying to determine how to be successful in the year ahead.
The year 2015 had an unusually long period of the S&P 500 Index trading within a fairly narrow range, followed by a correction and a recovery. So, can we expect more of the same or something much different? My fearless forecast for 2016: Yes, we can. (I’m here to help.)
Financial blogger Ben Carlson provided a great observation when he said that, “Predications are easy. Managing money is hard.” He asks, “How does someone stand out when competing with tens of thousands of other people making predictions about the markets? They make unconventional forecasts that have a very small chance of ever happening, but they do so with complete certainty.”
He then adds, “Being outrageous offers people in the finance industry optionality on giving them a voice. When there are no consequences attached to your actions—and no accountability to investors—you can say almost anything. Think about all of the so-called prophets from the financial crisis. How many of them go on the speaking circuit as ‘experts’ for being right once in a row?” Answer: most of them.
So then why do otherwise rational investors hang on every word some of these pontificators make? The fact is that listening to a pitch presented in an intelligent-sounding manner, together with the delivery of a true believer, can be hard to simply ignore.
Most people need some degree of certainty regarding the investing of their money. That’s really tough to do in an environment like the stock and bond markets where, in my experience, the only thing that is certain is uncertainty. Hence, the need to know what’s coming…
In the course of talking with folks about investing, a discipline our firm sees as a long-term prospect, many of them really believe they now have a handle on how to avoid what happened to them last time by changing their holdings so that this time, in their mind, they’ll be able to avoid the negative stuff. The biggest challenge they face is that the likelihood of “this time” being exactly like last time is, statistically, no meaningful figure.
There are truly many ways in which people can make money in the markets, i.e., foreign currency trading, listed options, participating in initial public offerings, or concentrating your holdings in a sector on the hope of a big move, to name a very few.
The bigger consideration has to be what this cool new approach has to do with meeting your needs. Can you afford the time and money necessary to effectively and profitably manage these more esoteric, and usually, more volatile investments?
Every investment decision you make requires trade-offs. That’s how risk works. You can’t protect your portfolio from every eventuality. There’s no right or wrong answer for every investor. It really comes down to finding the trade-offs you’re comfortable dealing with.
Unlike what the “unconventional” storytellers referred to above would have you believe, the best financial advice is often boring, so it’s a lot easier to ignore.
For instance, Cliff Asness, co-founder of money manager AQR Capital Management, with more than $135.3 billion under management, said recently, “Genius is still good, but more and more I think it’s about doing something reasonable, that makes sense, and then sticking to it with incredible fortitude through the tough times.” Nothing about that gets the old adrenaline pumping, does it? Nonetheless, based on the amount of money he manages, it does seem to have some degree of success.
My personal belief is that your success as an investor has nothing to do with projections, predictions, convictions, or any other “shuns.” Your success is determined by how well you can resist abandoning a strategy designed to help you meet your longer-term goals and needs.
One of your biggest challenges is whether you can maintain your cool even when your peers say “this approach is dead” or the media decides “it’s not going to work going forward.” When you’re being accosted by such talk on a 24/7 basis, which really manifested itself in 2008 and 2009, is really when you need to stick with your investing strategy. Your ability to attain the long-term returns that count—the ones designed for your benefit; not for whoever just happens to be reading or listening—also will be affected by how well you stay the course.
In this coming year, with continued global uncertainty, elections, and whatever else may sneak up on us, you can be assured that things will change. This can give rise to fear. May I suggest you heed the words of Calvin Coolidge? He said, “If you see 10 troubles coming down the road, you can be sure that nine will run into the ditch before they reach you.”
The point I’m trying to make with this is that like in the story of Jason and the Argonauts, you have to tie yourself to the proverbial mast so that you can avoid the song of the Sirens calling you to abandon a strategy that’s worked in favor of the latest deal du jour, regardless of how enticing or safe it may sound.
Don’t wait for green light
Daily volatility is a function of normal markets. A study from Standard & Poor shows that, going back to 1926, it’s almost an exact 50/50 split between the daily moves of the market being up or down. Please understand that there’s no way to completely eliminate risk from the markets. It really comes down to figuring out which risks are necessary to get where you need to be, which risks you want to avoid, and which risks will minimize your regrets over the long run.
Cullen Roche, in his book “Pragmatic Capitalism,” offers this sage advice: “Investing really comes down to regret minimization. Some investors will regret missing out on huge gains while others will regret participating in huge losses. Which regret will wear worse on your emotions? Missing out on future gains or future losses? Diversification within a well-thought-out asset allocation is your best option to minimize these two regrets. You’ll never go broke practicing diversification, but you must be willing to accept short-term regrets in place of long-term ones. Diversification also helps control your behavior. You never completely miss out on the biggest gains while you never fully participate in the biggest losses.
Of course, diversification can’t completely protect you from poor performance over days, months, or even years. You have to be able to withstand losing money at some point to be able to make money over time. But diversification does protect investors from experiencing numerous poor cycles or decades, which is where real risk resides.”
Whether you’re talking about your money, your health, or your safety, you’ve got to get past that fear of the thing that has a tiny chance of happening. This fear blinds us to making the most of the remaining 90 percent, 95 percent, or 99 percent.
Michael Maehl is a financial adviser and Spokane-based senior vice president of Opus 111 Group LLC, a Seattle-based financial services any. He can be reached at 509.747.3323 or firstname.lastname@example.org.
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