Contributed by: Lewis J. Walker, CFP®
If one wants an example of the frustrations that arise by attempting to frame investment and market timing strategies based on predictions, we only have to recall 2016. After a disappointing start, major U.S. stock indexes by March had gone nowhere; the 2nd quarter was up, only to be followed by flat to volatile performance midst myriad worries, including Brexit and low energy prices. Predictions of a major market drop of 10% to 15% or more if Donald Trump won were legion. On election night, as Hillary’s “lock” on victory slipped away, Dow futures plummeted. The big surprise of 2016 was the “Trump bump.”
When I went through basic training and then Officer Training School in the military, confidence would grow as one witnessed others successfully navigate a grueling obstacle course. The same thing happens when a grueling market turns out to be positive. Confidence rises after a market jump. Confidence wanes after a market slump. If one looks at patterns and cycles, market surges generally are short and sudden. Look at a chart for Berkshire Hathaway (BRK) stock covering the last 10 years. Even a genius manager like Warren Buffett endured significant periods of values being lower than a previous high point. To be there for the spurts, you have to endure “downs” and go-nowhere volatility.
Prudent investors opt for patience and diversification. We never know what curve balls will be thrown at investor psyches. Bulls and bears trade places, and black swans hover. Market themes rotate, and rarely stay on top for extended periods. So, what’s the best bet for 2017? U.S. stocks? Large-cap, mid-cap, small-cap? Growth, value, core? Non-U.S. stocks? Commodities? Alternative investments? Energy? Real estate? Bonds? What forecast do you wish to bet on? Every trading day on Wall Street people swap bets. One sells, another buys.
Two years ago, there were widespread forecasts of the Dow going to 15,000 or lower. As this is written, the Dow is flirting with 20,000. The Dow first hit 10,000 in March, 1999, almost 18 years ago. We had to endure two confidence rattling bear markets on the up and down march to doubling. Could we see Dow 40,000 by 2035? Sure. Maybe. We just know that the “stairway to heaven” is not an escalator. For someone approaching retirement and a need to live off their nest egg for 18 years or more, some allocation to equities can be important to not outliving cash flow. How much risk to take? The answer lies in a thoughtful analysis of your unique situation. Every financial plan should be customized. Simplistic “robo” output is like asking someone who merely stayed at a Holiday Inn Express for a medical diagnosis.
The market start to 2017 is completely opposite that of 2016. Wage growth is positive, job numbers good. Interest rates are up but still below long term averages. The dollar is strong but that creates headwinds for exporters. The Russians and Chinese are flexing muscles. The Middle East continues a dangerous mess. U.S. troops still are in harms way. Terrorism threatens. Will Donald Trump start a trade war? Nationalism is rising in the U.S. and Europe, potentially upending globalist assumptions in place for decades.
Edward de Bono is a physician, psychologist, inventor and consultant. Author of the book Six Thinking Hats, he is a proponent of the teaching of thinking in schools. When one contemplates a conundrum, “thinking” is a critical skill. Mr. de Bono notes, “In the future, instead of striving to be right at a high cost, it will be more appropriate to be flexible and plural at a lower cost. If you cannot accurately predict the future then you must flexibly be prepared to deal with various possible futures.” In other words, diversify!
When you diversify, you will have sectors, styles, allocations, funds, or managers that outperform and underperform any given yardstick over a specific time frame. If you consistently bet on the current year’s winner of the Super Bowl or World Series to repeat in the next year, your piggy bank surely would shrink. Betting on a diversified portfolio of stocks for “the long run” has proven to be a winner. Defining what you mean by “the long run” is a function of a tailored financial planning process. See Warren Buffett, a paragon of patience and discipline.
If you grasp at straws in the wind, don’t stand at the edge of a cliff. Ignore the siren song of rants from touts on the Internet. Diversification and patience still count.
Lewis Walker is a financial planning and investment strategist at Capital Insight Group; 770-441-2603. Securities and advisory services offered through The Strategic Financial Alliance, Inc. (SFA). Lewis Walker is a registered representative and investment adviser representative of SFA which is otherwise unaffiliated with Capital Insight Group. Past performance is not a guarantee of future financial results. There is no guarantee that a diversified portfolio will outperform a non-diversified portfolio in any given market environment. No investment strategy, such as asset allocation can guarantee a profit or protect against loss in periods of declining values.