Last week, I heard three separate interviews from legendary investors of our generation. Not to my surprise there was disparity in their predictions of what the future holds for the stock market. All three men made a case with a lot of merit, backed by their decades-long experiences. If one seasoned professional is bullish and the other is bearish, then someone has to be wrong. So why do we even listen to prognosticators or opinions at all?
Like anyone, I can also make predictions, but I feel you would be better served if I work within the parameters of what I can back up, so sorry to disappoint.
First, we can agree there is a high degree of certainty that things are uncertain. Presently, the data supports unemployment numbers not even rivaled by the 1930's, restaurants that are limited to 25-50% occupancy based on where you live, malls that look like something from an apocalyptic movie, the travel and entertainment industry being forced to reinvent themselves, corporate earnings reports that provide no guidance as to what the future holds, consumer spending that is weakening, etc. For anyone that studies history, you might conclude this resembles a severe recession, or dare I use the word "depression."
For now, we are forced to be spectators to see how it plays out in terms of a vaccine and future preparedness, and what velocity our market and economy will rebound.
Second, we have to behave as though markets are efficient and prices are generally fair at any given moment. For every pessimist (seller) there is an optimist (buyer), who agree on a price based on their best thinking at that time. This is why it's called an exchange and a market.
To further support this point, we can defer to the wisdom of crowds in providing a higher degree of certainty. The idea that we are collectively smarter than individual experts when it comes to problem- solving, decision making, innovating and predicting can be applied to behavioral economics and investing. For example, the NYSE alone trades approximately 3 billion shares per day, so can we infer that one investor has an upper hand over the majority? Highly unlikely.
Third, you can't always connect the economy to the stock market. As it has been disclosed to thousands of potential investors, "past performance is not indicative of future results." When the market bottomed in March 2009 there was still much more to report about foreclosures, bank collapses, FDIC funding and unemployment to name a few. From March – June 2009 the S&P recovered roughly 40%, yet very few had the liquidity or fortitude to participate. The worst-case scenario is those that turned a temporary decline into a permanent loss on the march to the bottom by selling out of their portfolios in an attempt to wait until it was more reassuring to reinvest. I read once that "investors that pick the bottom are either lucky or liars." The reality is when the markets recover it happens over the course of only a limited amount of trading days, making it difficult to time. Historically speaking, all of the best trading days have occurred in the deepest depths of bear markets. Because this is true, investors who follow their emotions or lose sight of their long-term investment goals will miss the best days, because they occur exclusively during the worst times.
In fact, in a long-term study1, researchers found that the average American large cap index fund returned approximately 10% per year over a thirty-year period, but the average investor in similar equity funds during this timeframe earned only 4%! This 6% difference is the "behavior gap", the predisposition to react emotionally – buying high and selling low.
Instead of having an opinion that has an undetermined chance of being right, it is our job to increase your probability of success over the long term. The best possible way we can be of value is to ensure you remain objective and well-informed about how current events impact your personal plan, and increase confidence by imparting perspective.
To that end, we have discussed our philosophy in the past and will continue to reinforce. It can be relied on through good markets and bad. My many years of working with investors through all these market cycles have given me a perspective that we can distill into the few most important concepts for long term investment success.
We call it the Acadium Investor Philosophy:
- Markets are efficient; it's difficult to get an edge and consistently outperform the benchmarks/ indexes.
- Capitalism will make you money over time; stocks might be irritational in the short term but companies are not.
- Patience and discipline are how you earn your return.
The difference between good and average investors is behavior.
- The average investor underperforms their own portfolio due to the behavior gap.
- Objective advice is the antidote to emotional errors.
There is a science to investing.
- Portfolios should be driven by evidence and science, not by emotion and opinion.
- Control what you can control. In investing this includes costs, taxes, diversification and factors of higher return.
The most important question behind investing is WHY?
- The right time to invest is when you have the money. The right time to sell is when you need the money.
- Investing is only relevant in so far is it allows you to live the life you want to live most.
Opinions from legendary sources are still just opinions. When it comes to markets and investing, there are a number of specific factors (law of large numbers, efficient market hypothesis and media distortion) that make opinions not only worthless, but potentially harmful.
As your trusted advisors, we are here to serve you and your family through these uncertain times.
Tom Udovich, CFP®
Partner, Acadium Financial Partners
3601 PGA Boulevard, Suite 301
Palm Beach Gardens, FL 33410
Any opinions are those of Tom Udovich are not necessarily those of Raymond James. Securities offered through Raymond James Financial Services, Inc. member FINRA/SIPC. Acadium Financial Partners is not a registered broker/dealer and is independent of Raymond James Financial Services. Investment Advisory Services offered through Raymond James Financial Services Advisors, Inc.
The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. There is no assurance any of the trends mentioned will continue or forecasts will occur.