By Dan Goodwin - Chief Investment Strategist
The last several years have whip sawed investors with a wide range of both positive and negative markets. Several of our clients have shared various market forecasts and predictions with us from newsletters, financial pundits, money managers, economists, stock jockeys, fiscal mystics and market researchers. Two of the forecasts we reviewed were calling for a 10-year secular bull stock market and three were predicting what sounded like financial Armageddon, doomsday, and the zombie apocalypse all rolled into one. Have you notices as we have that there are always forecasts and predictions like this in our news feeds, online and on TV, and have you ever wondered if you should be paying attention to them?
Most investors understand that it is a good idea to save money in tax-deferred retirement accounts such as Employer sponsored 401(k)’s, 403(b)’s, 457, and IRA’s. We understand that per the IRS rules, we cannot access those accounts until age 59 ½ without incurring a 10% penalty for premature distributions. If you find yourself in a situation where you need to access these funds, you may be wondering what are my options?
Most of these forecasters make many great points while managing to comprise a great deal of knowledge and information in their theories or rants. Some sound super sharp to me although I usually notice that these predictions all have much to do with short term movement in the markets.
At Provident we are eternally grateful that we work with a wide range of tools and solutions that can minimize our dependence on being able to accurately predict the markets in the short term. After all, we claim to have no special skills in this area, so predictions and forecasts are of little use or value to us.
I would be remiss if I did not clarify more clearly that our models, tools, solutions, structured investments, and alternatives are custom tailored in such a way as purposefully remove reliance on any short-term predictions with interest rates, fed policy, bull or bear markets, inflation, gas prices, commodity indexes and the like. This is important because as you may well know, short term predictions from even who we believe to be our “best of the best” statistically turn out to be wrong more than they are right.
I’ve always reasoned that if anyone could accurately predict the markets in the short term how valuable and profitable that information would be and how much wealth could be created with that knowledge. I’ve also reasoned that if such information existed, that I’m doubtful someone would give it to us for free. Rather that information could be parlayed into stratospheric wealth creation.
Our planning seeks instead to use math and rules-based formulas, technical and fundamental analysis, models and algorithms that are engineered to remove the need for predictions or forecasts, therefore also removing potential for harmful behavior issues such as market timing, and emotional investing decisions which both investors and financial advisors alike are not immune to. Our theory for this methodology is well documented, with vast amounts of empirical data and research that states that short term forecasts and predictions tend to be consistently unreliable and therefore of little help when building retirement plans and strategies.
Said another way, no one really knows if the next 20% in the market will be up or will be down. What we do know is where the next 100% movement will be, and that arrow is green, and its direction is up.
My observance is that the investor questions in this area seem to go something like this…. Is there a reliable source of information or sources of information where I can gain insights into the markets and economy which will tell me or my money manager if I should be in the market, out of the market, buying gold, shorting the Yen, overweighting bonds, cash, small stocks, oil, real estate, or something else?
I can tell you that we are very clear about what we know and what we don’t know and also what we believe in. A few of our observations over the past 30 years are this……. We know that every single day we can go on the internet and can find many so-called experts who can tell me in quite articulate fashion how the markets are going down and why the end is near. They do this with very sophisticated charts, graphs, scattergrams, historical references, and convincing narratives that I must say sometimes prove to be accurate.
We also know that on the very same day we can usually find just about as many pundits who are telling us why we are missing out on the next boom, wave, emerging technology, soaring stock or asset classes and/or the next big thing. They will cherry pick select market and stock juggernauts and can also provide quite the convincing analysis of why we are killing off our long-term returns with our diversified and disciplined approach.
Diversified and disciplined…. You don’t hear a lot about that these days because of the questions that are being asked. What we are asked on a day-to-day basis are questions like this…
Is it a good time to be in the market?
What stocks should I own?
Are interest rates headed down or up?
Is the market going to crash or go into a recession?
What sectors of the market are the best to invest in?
Should I be in bonds, real estate, equities, annuities or leveraged strategies right now?
In short, the questions I am being asked are “what’s working now”? I am exceedingly hopeful, with a high degree of passion and determination, that we can influence over time the families we serve to ask a better question. The question I want to coach people to ask is this…. “What always works”?
The answer to “what always works” is not elaborate, sexy, or particularly exciting. It is short and simple, and commonly overlooked, or gets lost in all the analysis and prognostication. The answer is, as we see it is this…. tactical asset allocation, disciplined diversification, investment integration, structured solutions, tax smart income planning, risk adjusted rebalancing, math and rules-based formula driven portfolio’s, hedging when appropriate, research, team collaboration, trust, faith, and belief in the future. That’s it, in a nutshell.
It's mastering the basics, in the same way the great Vince Lombardi mastered the basics of blocking and tackling and controlling the line of scrimmage in football. He didn't win all those championships with fancy pants, razzle dazzle, flea flicker plays. Investing, in my humble opinion, is also about mastering the basics.
I know this may not happen in my lifetime but one day, I would almost pray someone would ask me this question.
“How can I develop an investment strategy that meets my long- and short-term financial goals? How can I diversify my portfolio with engineered and structured solutions to reduce overall volatility? What asset allocation will fulfill my risk/return preferences, and how can I remain disciplined when my human nature and the media will urge me to make a handful of fairly common and predictable investing mistakes that could destroy my peace of mind and ultimately my financial security?”
Many years ago, I read a piece from the great Peter Lynch’s book “One up on Wall Street” – You may recall that Peter ran Fidelity’s biggest and most successful fund ever, the Magellan fund. Peter was in the 80’s and 90’s a household name who was highly sought after, much in the same way Buffett is today. Peter and Buffet have lots in common and the most obvious is this…. They both play the long game. They’re not particularly concerned about who’s in office, interest rates, the price of oil, or the crisis of the day which we can all so easily get drawn into. Warren Buffet says he and his partner Charlie Munger pay literally no attention to almost everything being talked about on the financial “news” channels.
Peter Lynch wrote this in his book that I saved and below is one of his quotes that has always stuck with me.
Peter Lynch https://en.wikipedia.org/wiki/Peter_Lynch
Still think someone (or even yourself) can predict the short-term market direction? Here are three paragraphs taken from One Up on Wall Street, written by Peter Lynch in 1989…. TIMELESS! Peter - "Every year I talk to the executives of a thousand companies, and I can’t avoid hearing from the various gold bugs, interest rate disciples, Federal Reserve watchers, and fiscal mystics quoted in the newspapers. Thousands of experts study overbought indicators, oversold indicators, head-and-shoulder patterns, put-call ratios, the Fed’s policy on money supply, foreign investment, the movement of the constellations through the heavens, and the moss on oak trees, and they can’t predict markets with any useful consistency, any more than the gizzard squeezers could tell the Roman emperors when the Huns would attack. Nobody sent up any warning flares before the 1973-74 stock market debacle either. Back in graduate school I learned the market goes up 9 percent a year, and since then it’s never gone up 9 percent in a year, and I’ve yet to find a reliable source to inform me how much it will go up, or simply whether it will go up or down. All the major advances and declines have been surprises to me. Since the stock market is in some way related to the general economy, one way that people try to outguess the market is to predict inflation and recessions, booms and busts, and the direction of interest rates. True, there is a wonderful correlation between interest rates and the stock market, but who can foretell interest rates with any bankable regularity? There are 60,000 economists in the U.S., many of them employed full-time trying to forecast recessions and interest rates, and if they could do it successfully twice in a row, they’d all be millionaires by now. They’d have retired to Bimini where they could drink rum and fish for marlin. But as far as I know, most of them are still gainfully employed, which ought to tell us something. As some perceptive person once said…if all the economists in the world were laid end to end, it wouldn’t be a bad thing". More than thirty years after these words were written by one of the greatest money managers of all time nothing has really changed. The investing public, both professional and amateur, are still seeking a holy grail. Market Gurus offer short term predictions and forecasts, and no one holds them to account all the many times they are wrong. The economists still have not retired in Bimini and only the long-term investors are winning the game. Our advice is this…. Continue to learn, stay diversified according to your risk tolerance, stay disciplined, focused, and rebalance regularly. Develop a cogent plan for your personal unique needs and preferences. Education that includes an understanding of the study of behavioral finance and how our own human condition and frailties can predictably cause any of us to do the exact wrong thing at the exact wrong time is our best defense against imprudent investing.
The markets for stocks and bonds, real estate, oil and gas, lending, private pensions, commodities and businesses are a winner’s game if invested correctly over time. To succeed one must be ready to bargain away the chance to make a killing, in exchange for the assurances of not getting killed. That or you must be lucky consistently, and we prefer to plan on the former. Data shows us that going back almost 100 years the markets have produced positive returns in approximately 3 out of 4 years. That’s a winner’s game, and that has happened during great depressions, world wars, oil embargos, balance of payment crisis, fiscal cliffs, bird flu, assassinations, Viet Nam, Cuban Missile crisis and the Jerry Springer show!
The only thing that has consistently failed investors is this. Short term predictions and forecasts, lack of planning, lack of discipline, get rich quick schemes, speculation and its cousin gambling with investments, human behavior, and hubris, which is a term of the Greeks which essentially means, thinking you or someone else is smarter or more powerful than they are and then paying a terrible price for it. My advice to investors is that they do not fall for the ruse of market forecasts and predictions and to turn away then someone will tell you what’s going to happen next in the markets or economy. You don’t need the irritation, and it does nothing for anyone’s peace of mind. Have a plan designed for you and then let the plan work for you. Turn your attention to what matters to you more than money... Your family, health, faith, values and virtues, and those ideals that matter the most to you. These are what deserve your attention and time and are also what truly matter most of all.
For more information call Dan Goodwin at 281.466.4843.