Please Don’t Call Me An Expert
Scott Rasmussen (well known pollster and political analyst) points out in an article on 12/25 (http://www.arcamax.com/politics/mod/scottrasmussen/s-1775884 ) that experts in so many fields have a way of being consistently wrong in their forecasts. In the field of economics and investing they manage to be wrong on picking stocks, evaluating companies, predicting elections and even setting government policy. He offers one possible explanation: things are way more complex than any one person can figure out. I have another explanation: human nature tends to focus on what’s happening lately. If the price of a stock has been rising, then we expect it to keep rising. If the stock market has been rising, then it’s easy to think that will continue. Imagining that 2016 could turn into 2008 is hard for people to think about – until panic sets in.
The Antidote To Expert Forecasts
I may sound like I’m about to deliver an expert forecast but I would prefer to be an historian. I would prefer to keep things simple, as well. The markets crash and burn, inflicting pain and suffering, every 6 to 8 years. The drop historically has been in the range of 30% (closer to 40% last time). That last time was 2008 and the time before that was 2002. It’s a problem if your portfolio consists of investments that can all turn upside down together, so we need investments that can provide some help when the markets go south.
I have placed some investments in the portfolios that can help. We’ve held some of them for a while and one is more recent. I’m still adjusting some accounts. We have several funds that are “zero correlated” with the stock market. When we use the term “zero correlated” it means that if the markets go up or down, these funds move more or less independently over longer periods, according to statistical correlation analysis. This is the true meaning of diversification, which exists less and less in today’s investing landscape. Has anyone noticed that bonds pay nothing and are vulnerable to rising interest rates?
The accounts are not all identical but we are currently only about 25% to 30% exposed to stock funds. I am waiting for a short term “pop” in the market, which is overdue (1/13/2016) so that I can make some further adjustments.
The Good Side
The good side of a bear market (which we are most assuredly in), is that the end of it is a buying opportunity. I would guess that we’re far from that point. So IF we can hold onto our shirts, we could get positioned to make some money on the other side of this. How will we know when it’s time to increase our exposure? Hopefully not by relying on an expert. And hopefully not by relying on human nature, fear and greed. The serious answer is probably to do it by degrees. I also rely on objectively researched market statistics, which I outsource at considerable expense. The market statistics have been pointing to this environment for most of the last year. But it’s still hard to know. We’ll do our best and err on the side of caution.
I don’t engage heavily in New Year’s resolutions but this year, one of my resolutions is to write this blog more frequently.
Please contact me if you would like to discuss your portfolio.