Tuesday, September 22, 2020

Strategies Beat Predictions and Hunches

 

 

Ask The CFP® Practitioner

Darcie Guerin
darcie.guerin@raymondjames.com

“It’s what you learn after you know it all that counts.” ~ Earl Weaver (1930-1993), Baseball Hall of Famer and “the sorest loser who ever lived.” 

Question: What will happen to the markets during 2017?

Answer: Strategists, economists, and even Certified Financial Planners™ are notorious for trying to predict markets. Over my career, it’s become obvious that short-term market forecasting is sheer speculation. Therefore, the answer to your question is “It depends.”

On average though the market has been up more times than down. In fact, the S&P 500 Index has produced positive returns for every 20-year period since 1927. Based on this, it’s safe to say that markets will be up…or not. The more meaningful questions are “What rate of return is required to obtain your goals,” and “Are you invested appropriately for your stage of life, risk appetite and needs?”

It’s likely that certain investments will be higher than they are today. Corporate earnings and growth forecasts are logical predictors of individual stock prices which contribute to overall market valuations. Over any twelve-month period numerous external factors that we have no control over will influence market levels. Obviously, we’ll experience economic headwinds and tailwinds as we do every year.

Even historic market predictors such as the Santa Claus Rally and the January Indicator are fallible (SCR: see column from December 23, 2016). There was no SCR last year so commentators are taking this as an ominous warning for stocks this year; I disagree. Even without a 2015 SCR and the January Indicator (so goes the month, so goes the quarter, so goes the year) predicting a down year for 2016, we still posted strong year-end results.

Instead, let’s look at a few simple principles as shared by Jeff Saut, Chief Investment Strategist, and Equity Research of Raymond James. These were first published by The Financial Analyst Journal in 1995 from a letter by Arthur Zeikel to his daughter. At the time, Arthur was head of Merrill Lynch Asset Management.

“Personal portfolio management is not a competitive sport. It is, instead, an important individualized effort to achieve some predetermined financial goal balancing one’s risk-tolerance level with the desire to enhance capital wealth. Good investment management practices are complex and time consuming, requiring discipline, patience, and consistency of application. I hope the following advice will help. 

1. A fool and his money are soon parted. Investment capital becomes a perishable commodity if not handled properly. Be serious. Pay attention to your financial affairs. Take an active, intensive interest. If you don’t, why should anyone else? 

2. There is no free lunch. Risk and return are interrelated. Set reasonable objectives using history as a guide. All returns relate to inflation. Better to be safe than sorry. Never up, never in. Most investors underestimate the stress of a high-risk portfolio on the way down. 

3.

 

 

Don’t put all your eggs in one basket. Diversify. Asset allocation determines the rate of return. Stocks beat bonds over time. 

4. Never overreach for yield. Remember, leverage works both ways. More money has been lost searching for yield than at the point of a gun (Ray DeVoe). 

5. Spend interest, never principal. If at all possible, take out less than comes in. Then, a portfolio grows in value and lasts forever. The other way around, it can be diminished quite rapidly. 

6. You cannot eat relative performance. Measure results on a total return, portfolio basis against your own objectives, not someone else’s. 

7. Don’t be afraid to take a loss. Mistakes are part of the game. The cost price of a security is a matter of historical significance, of interest only to the IRS. Averaging down, which is different from dollar cost averaging, means the first decision was a mistake. It is a technique used to avoid admitting a mistake or to recover a loss against the odds. When in doubt, get out. The first loss is not the best but is also usually the smallest. 

8. Watch out for fads. Hula hoops and bowling alleys (among others) didn’t last. There are no permanent shortages (or oversupply). Every trend creates its own countervailing force. Expect the unexpected. 

9. Act. Make decisions. No amount of information can remove all uncertainty. Have confidence in your moves. Better to be approximately right than precisely wrong. 

10. Take the long view. Don’t panic under short-term transitory developments. Stick to your plan. Prevent emotion from overtaking reason. Market timing generally doesn’t work. Recognize the rhythm of events. 

11. Remember the value of common sense. No system works all of the time. History is a guide, not a template. 

This is all you really need to know. Love, Dad” 

One final suggestion based Earl Weaver’s quote; stay teachable and know when to ask for help. It may be helpful to remove subjective and emotional influences from your investment plan. Extremes are rarely the answer. Stay focused and invest accordingly.

The opinions expressed are those of the writer, but not necessarily those of Raymond James and Associates, and subject to change at any time. Past performance may not be indicative of future results. Investments cannot be made directly in an index. No investment strategy can guarantee success. The S&P 500 is an unmanaged index of 500 widely held stocks.

“Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™, CFP® (with plaque design) and CFP® (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements.” 

This article provided by Darcie Guerin, CFP®, Vice President, Investments & Branch Manager of Raymond James & Associates, Inc. Member New York Stock Exchange/SIPC 606 Bald Eagle Dr. Suite 401, Marco Island, FL 34145. She may be reached at 239-389-1041, email darcie.guerin@raymondjames.com. Website: www.raymondjames.com/Darcie.

Leave a Reply

Your email address will not be published. Required fields are marked *