Spokane Journal of Business

Assessing investment performance in the new year

Look beyond major market indicators when evaluating

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As I mentioned last November in this space, “Elections or not, stocks tend to be forward-looking.” 

The S&P 500, which had been up about 2 percent for the year just before the election, finished with gains of just over 9 percent. A lot of the move since the election has been a matter of traders buying in the sectors that, based on the President’s acceptance speech, were seen to be doing well once he got in.  

One other point from the November piece was, “Unlike the gap between each party’s ‘occasionally’ differing views on policy, there’s a common thread in historical returns: The differences in returns reached under either Democrat or under Republican presidents are not statistically significant. Using global financing data going all the way back to 1853, the average annual stock market returns—based on the party controlling the White House—were 11 percent for each party.” For the record, to achieve that average, an investor would have to have stayed invested. 

For most of the past eight years, many investors have felt that the market has been in a Goldilocks environment: neither too hot nor too cold.  The economy hasn’t grown slowly enough to cause recession or deflation, nor fast enough to bring on hyperinflation and the need for restrictive Fed action. The markets have been strong enough, but not so strong as to be bubble-icious.  The same seems to apply to investor psychology.

By now, most of you have looked over your year-end statements to see how you did. 

In good market years, many investors become upset that their performance didn’t match that of the major market indicators, such as the S&P 500. Performance of those indices should be only one part of your review. Don’t start and stop at this backward-looking comparison. 

Consider this. If you’re a long-term investor, do you really want or need to match the return of a specific index or benchmark, together with the normal fluctuation that usually comes with it? I suggest that the better place to start your review instead is focusing upon whether your overall asset allocation—the mix of stocks, bonds, cash and other securities you’ve selected—is still in line with your investment goals and overall strategy. 

You may be setting yourself up for more risk than you intended if all of your assets do show similar movement. That looks more like betting than investing. A proper diversification typically means you’ll usually be mad at one part or another. Spreading your assets across multiple sectors is necessary, as stocks in the same sector usually act similarly, as do bonds of similar ratings and maturity dates.

For your own benefit, no matter how well you know an industry or specific company, your portfolio shouldn’t be invested too heavily in one geography or sector. We see this frequently in corporate 401(k) plans when a person has loaded up on their company’s stock, to the exclusion of many other asset choices. No shares are immune from market cycles. I believe that no single company should exceed 5 percent of your portfolio’s value. The higher the percentage, the more damage it could cause should things not go as you’d hoped.

Regarding your asset allocations, if you need long-term growth to reach your goals, or maintain your buying power over time, holding some stocks is likely necessary. Ongoing widespread negative sentiment about stocks, in general, has caused many investors to put too little in stocks relative to their longer-term goals and needs. Holding large amounts of cash, other than for an emergency fund or targeted for a near-term purchase, provides, I believe, a potentially large opportunity cost that could reduce your overall return.

What could go wrong with your strategy? To quote economist John Kenneth Galbraith, “We have two classes of forecasters: Those who don’t know—and those who don’t know they don’t know.”

One of the hardest parts about investing in the stock and bond markets is one thing you do know is the fact that eventually, they’ll go down. You just never know how much the drop will be once they start to fall. As I said earlier, very few years or cycles ever follow the averages.

I don’t know how to decide what it is that will go wrong—or when it will do so. The truth is that the obvious trouble-making candidates are likely to be anticipated and already largely priced in. It’s the surprises no one can anticipate that move markets most, if they were to happen. For instance, it’s safe to say the greatest single influence on the economy and market over the last three years was the 75 percent decline in the price of oil from June 2014 to February 2016.  But who predicted it? Certainly not OPEC.

There are a lot of folks who believe that Murphy’s Law, investing version, is directed right at them. The law says that everything they buy will immediately fall, that everything they sell will immediately rise, and every new strategy they begin will immediately underperform. The challenge is that, when things don’t go right in the real world, the first thing most investors look to do is change their strategy. Not a good idea. You have to stay invested to have a chance to receive similar long-term rewards that the markets have provided in the past.

Like all of our emotional experiences, the full experience of losing important money can’t be effectively explained simply by reading, talking, or hearing about it. Experiencing the Great Depression was light years different than reading a few paragraphs in history books. The pain and emotions you might feel from losing money isn’t something that can be imagined or simulated. No one knows how they will react until they are in that moment of maximum pain.

I think that because of this emotional pain, when the market does one of its usual and normal gyrations, asset prices shouldn’t be the only factor determining how you’re doing as they can change daily. A lot of investors, even those who’ve researched and back-tested their strategies back almost 100 years, suddenly feel as if it must be changed after only a poor six-month stretch. 

Many of those folks feel as if they need to make changes, if only to relieve their discomfort and anxiety. All that does is to compound the effect due to later challenges about when to get back in. You must be a stone cold, steely-eyed disciplinarian to stick with your rules-based system when it’s not working as you’d like. A trusted adviser can be helpful to you in those times.

Since the election, there’s been a shift toward the type of stocks and other investments that can outperform during periods of rising growth, such as tech, infrastructure, energy, and financials. Should you start or add to these now? Unfortunately, there’s no such thing as a front-test. Every market environment is different than the last, so you have to be able to accept that the future will never look exactly like the past. That’s a main reason for allocating your assets in such a way as to aim you toward your goals and not be distracted by headlines or Twitter feeds. 

Even eight years into our expansion, I think there are many reasons to believe that growth will continue this year. I maintain that we’re in a secular bull market; one that can last multiple years, complete with interim bumps.

We never know how long the market will continue to move upward. One way is to keep an eye on the trends. For instance, is the general market psychology depressed, average, or frothy?  Is the market tight, normal, or unthinkingly generous?  

Those investors who looked beyond the headlines, focused on their long-term goals and avoided trying to time the market have tended to reap the rewards over the long run. That’s true at any time of the market cycle. 

Our future and the market prices are—and will be—much more influenced by the actions of everyday people in the economy than headlines and political puffery.


Michael Maehl is a financial adviser and Spokane-based senior vice president of Opus 111 Group LLC, a Seattle-based financial services company. He can be reached at 509.747.3323. Securities and Investment Advisory Services offered through KMS Financial Services, Inc.

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