The Virtues of Not Having a Market Opinion

Following up on last month’s commentary when I listed some of our key principles, I thought I would delve further into the area of trying to predict the market as I’m often asked what I think is going to happen next.  Some thoughts:

  1. What I am talking about in this commentary relates to the difficulties that arise when we believe that we can determine with a high degree of confidence what the market is going to do in the short-run, which I’d define as anywhere from one day to five years.
  2. In the long run, our stock market will continue to rise to reflect the growth (primarily in earnings) of the various companies that make up the market.  It is this long-term, inevitable growth that allows us to develop financial plans geared to achieve our cherished long-term goals such as dignified and comfortable retirements.
  3. The inevitable market appreciation will be periodically interrupted by always temporary short-term declines, though as we saw during the Great Financial Crisis, these declines can be severe, harrowing, and last for a few years.  Paraphrasing an old quote from legendary Fidelity Magellan fund manager Peter Lynch, “the key in making money in stocks is not to get scared out of them”.
  4. Good investing forgoes short-term market views, and thus does not have to be focused on the day-to-day ups and downs.
  5. Personally, I have held ‘market opinions’ in the past (and even in the present).  Most of the time I don’t act on them and simply continue to follow my investment plan.  However, I would guess that the times when I do make “side trades” based on my market views, they don’t work out at least 90% of the time.  So much for being a market “expert”.

So, if we don’t have a market opinion, how do we invest?

  1. The only appropriate market view, as stated above is to be long-term bullish (anticipating higher prices) and short-term agnostic (believing that nothing can be known in the short-term).
  2. Develop an appropriate asset allocation that matches your financial goals.  For example:
  3. We have clients who are younger, heavy savers for retirements, college educations, etc. The appropriate asset allocation would tend to be heavily invested in stocks as these clients have the time to ride out the temporary declines, and in fact, to take advantage of these periodic swoons to pick up stocks when they are on sale.
  4. We also have clients who are nearing or in retirement with sufficient nest eggs to be able to live comfortably as long as they don’t experience a major portfolio decline at a time when they are withdrawing or about to withdraw for their retirement income.  The appropriate asset allocation for them would be a more conservative blend of stocks and bonds.  While this may feel like it’s too conservative during roaring bull markets such as today when their portfolios lag the major stock indexes, the protection will be quite welcome whenever those temporary declines hit.
  5. The key for success in both cases continues to be patience and discipline – for the young saver not to panic when the declines are really severe and the older (near) retiree to be patient when returns lag in the big bull markets.

Maybe the idea is best captured in this quote attributed to the late comedian Milton Berle:

“I used to be bullish, then I was bearish, and now I am brokish.”

Just be long-term bullish!

All Clear?

This past week has witnessed a confluence of seemingly very market-friendly events.  With much uncertainty lifted, market prognosticators have been giving the green light to the markets, some even predicting a “melt up” or panic buying to new highs.  Here are some of the newsworthy events from last week:

  • Phase One in trade deal “agreed to” between China and the U.S.
  • The Federal Reserve stood pat with interest rates and indicated it would be quite unlikely to raise rates anytime soon as they set the bar quite high.
  • Boris Johnson won a resounding victory in the United Kingdom’s election giving him the power to move quickly to resolve the Brexit negotiations.

Some thoughts:

  • See my thoughts above about short-term market views, when taking the “all clear” as a signal to be short-term bullish.  Don’t do it.
  • Remember Warren Buffett has talked about the high price investors pay for “certainty”:

“The future is never clear; you pay a very high price in the stock market for a cheery consensus. Uncertainty actually is the friend of the buyer of long-term values.”

Reach out today. This could be the start of a great relationship.

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