Written by: Corey Janoff
This post was originally published on our previous blog website on December 1, 2017 and has since not been revised and/or updated.
I read an article in the Wall Street Journal over the weekend titled, “Wall Street’s 2017 Market Predictions: Pathetically Wrong.” For people who understand and accept how unpredictable markets can be, this comes as no surprise. For others, it should hopefully shed light on a common recurring theme each and every year. Wall Street pundits make predictions with a success rate that is no better than a coin flip (in some cases, worse than a coin flip). And nobody seems to care about the track record. Below are some of the highlights of the article.
Bullish on Bond Yields, Stock Prices, and the Dollar
Every analyst is entitled to his or her own opinion and rarely does everyone agree. However, there is often a majority consensus among the “experts.” Towards the end of 2017, after Donald Trump was elected president, most analysts expected President Trump’s tax cuts would spur wage growth and inflation and strengthen the dollar. Bond yields were expected to rise with rising interest rates.
A year later, tax reform is still in the developmental stages and inflation is relatively stagnant. The dollar is still strong, but has weakened this year (by about 15% compared to the Euro). The 10 year bond yield has declined since the start of the year. Stock prices have gone up, but by way more than anyone expected. Most stock market prognosticators predicted “modest growth.” Almost every asset class is up double digits on the year.
More Volatility
Experts also predicted more volatility (price fluctuation) this year, as a result of political changes. The year isn’t over yet, but we haven’t seen much volatility at all. Stocks have basically risen steadily since the start of the year. The biggest decline of the year (when looking at large US stocks) came over the span of March 1st to April 13th where the S&P 500 fell by a whopping three percent. This is in contrast to the beginning of 2016 when stocks fell by about ten percent in January and then rebounded by the end of spring.
What Can We Learn from This?
STOP READING/WATCHING/LISTENING TO PREDICTIONS! It is difficult enough to successfully predict what the markets will do and when it will happen and as a result, equally as difficult to pull off a trade that capitalizes on it.
Also, why do we care so much about yearly predictions (or quarterly or monthly for that matter)? What will stocks do this year? What will bonds do this year? Why does it matter? What are you investing for where a change in price in the next 12 months is going to materially affect you reaching your goals?
I harp on it all the time; the time horizon for your investments should dictate how you invest your money. If you need the money in the next year, you shouldn’t invest it in anything! Keep it in cash (preferably in an FDIC insured bank account). The last thing you want is to risk the money you need in the near future. If it declines in value, you have less than what you started with when you actually need the money. If it rises in value, how much can it realistically go up by in the next year to where it substantially changes what you can do with that money?
Say you have saved up $100,000 for a home down payment. That will get you a 20% down payment on a $500,000 house. If you invest the money in stocks and the investment goes up by 10-20% in a good year, you now have $110-120k. I guess that could get you a 20% down payment on a $600,000 house. But can you even afford the mortgage that is $80,000 larger? More realistically it will get you some nicer furniture when you move in. But if the stocks you invest in decline by 20-30% (quite possible if the economy dips into a recession – declines in stocks happen swiftly), then you can’t afford the $500,000 house you had your sights set on. You can now only afford to buy a $350-400k house. Or you have to wait a while longer until you can build your savings back up.
If you are investing for retirement, are the 2018 stock market predictions going to change how you invest your money over the coming months? Let’s say you are 35 years old. Odds are you will be working at least another 25 years before you retire. And then hopefully you live another 25+ years after that. So we have a 50+ year time horizon on this money. If the money you have invested goes up in value in the next 12 months, then great! You are one small step closer to retiring, but still a long ways away! Keep on saving! If the balance you have invested goes down in value in the next 12 months, then oh well. You are still a long ways away from being able to retire. Keep on saving!
Even if you are on the doorstep of retirement (or in retirement), we need some money invested conservatively, so that we have money to live on in the next few years that won’t fluctuate with the markets. We also still need to have money invested more aggressively to hopefully grow, so we can support our lifestyle in the latter years of retirement.
Stay Diversified and Commit to Saving
I wrote about this in the second half of last week’s blog post. If you get too caught up in recent performance and trying to predict what will do well in the immediate future, you will end up with an overly concentrated portfolio. If/when the tides change, you have a lopsided portfolio that will likely underperform.
If you spread the risk around numerous asset classes, some areas of your portfolio might do well in a given year, while others won’t do as well. That way, at least some of your portfolio is doing well. If you are overly concentrated, you are taking an all-or-nothing approach. You are betting big on one area of the world economy. If the stars align, then you could do well. But if you swing and miss, you strike out and set yourself back.
How Much Do You Really Need?
You don’t need the best returns each year to reach your long-term goals. I was recently talking with a client who is nearing retirement and this particular client likes to focus on the recent performance of each of the funds in his portfolio. In our last meeting, he said, “I don’t want to invest in bonds. Bonds don’t perform very well. I want at least an 8% return each year if I’m going to retire.” We were looking at retirement projections together and it turns out he doesn’t need an 8% return each year.
I showed him the projections. “If we can average a 4-5% rate of return each year, unless you live past 100, you’ll be fine in retirement.”
“I’m not going to live that long. I’ll be lucky if I get to 90.”
“Then we don’t need to shoot for 8% returns!” I replied. “We can be more conservative and protect the downside. You have done an excellent job saving and investing throughout your career. This means you don’t have to take as much risk to make your money last in retirement. Your returns won’t be as big in the good years, but the losses also hopefully won’t be as big in the down years, which will save you from a lot of chest pain.” Slow and steady wins the race in this scenario.
We can’t control the returns our investments deliver. Heck, we can’t even predict the returns investments might deliver.
We can control how much we invest and what we invest in. We aren’t going to the casino with our retirement money. We are systematically saving and investing towards a series of goals. So let’s take some of the guess-work out of the equation and focus on what we can control.
Disclosures:
These are the opinions of Corey Janoff and not necessarily those of Finity Group, LLC, or Cambridge Investment Research, Inc. Any investment involves potential loss, including total loss of principal. Consult with your financial advisor before making any investment or implementing a financial strategy.
