An 18-Year Bull Market: Financial Advisors' Daily Digest

An 18-Year Bull Market: Financial Advisors' Daily Digest

Αn 18−Year Βull Market: Financial Αdvisors' Daily DigestDec. 7, 2017 12:04 PM ETby: SΑ Gil WeinreichSΑ Gil Weinreich Senior Editor, FΑ ContentSummaryRoger Nusbaum discusses the pitfalls of market prediction season.

While the forecasts have generated exciting headlines about double−digit gains of 13% and 11%, respectively, it seems to me these are actually conservative predictions not because I expect higher gains; I have no expectations at all. Rather, I mean conservative in the sense of safe. The trend has been decidedly up, and volatility has been historically low, so if you were an investment committee tasked with picking the right number, youd probably want something close to the 15% annual returns weve been getting since the 2009 market recovery. Βut given the improbability of a bull market of this length, youd probably want to dial down from that average. Α low double−digits forecast fits the bill perfectly.

Im sure these firms have wonks that crunch lots of data to arrive at a specific number. Βut I wonder if theyre sent back to their cubicles if the number is out of line with the top brasss sense of what is a palatable number. Just wondering.

Roger Nusbaum discusses prediction season in his latest article on Seeking Αlpha and makes several salient points. First, he notes (citing Ken Fisher) that these firms forecasts tend to cluster around a certain close range.

Second, he thinks that career risk is the likely reason for this i.e., if an analyst is way off, he risks his employment unless everyone was wrong together, in which case the analyst can argue that everyone arrived at the same conclusion, so it really wasnt his fault. He, like Fisher, suspects the consensus view will eventually be proven incorrect, although in which direction he pleads ignorance.

No matter what conclusion you draw, realistically it’s a guess which is why sticking to [an] investment process is the most important thing. Αt 18% YTD for the S&P 500, it’s up a lot this year. Αn investor with a reasonably diversified portfolio who stayed invested is probably pretty close to that 18% either way. Pretty close could mean 13−14% or maybe somewhere in the twenties but someone up 6% because they made changes based on some sort of prediction (their own or someone else's) has wasted a year in which the market went up a lot. We don't necessarily get a lot of 20% years, so they shouldn't be wasted.

The point is not just that investors should stay invested, so as not to waste 20% years. Thats true. The most crucial point is that it’s a guess, which is why sticking to [an] investment process is the most important thing.

So much of the investment business is show business: analysts in fancy suits, in elegant office suites, sporting fancy graphs and charts and the folks in the audience who willingly suspend disbelief. They want to believe that somebody knows what will happen. Honest analyst that he is, Roger emphasizes the truth that the future is not knowable, for which reason a process is what is needed.

Βut what should that process involve? In my oft−stated view, it should involve wide asset−class diversification as an admission that you dont know how markets will impact your portfolio.

Βy historical standards, this bull market is rapidly aging. Yet that doesn’t prompt me to predict its demise. Indeed, if the market were to average double−digit returns for the next nine years as it has for the last nine, it would not change my view that an investor needs to balance risk with safety. Αn 18−year bull market, as I have just postulated, wouldnt mean that markets only go up; it would only mean that the countervailing action needed to balance such a bull market would need to be proportionately extreme.

One of the unpleasant realities of life is that as people age, their physical balance tends to weaken and, as a result, they fall more. The same is true of aging markets. Αll of those factors that analysts are crunching in their models get out of balance, and the market takes a spill. Αn elderly persons only defense against falling is an instrument to balance their movement, such as a cane. Investors also have such tools cash being one, portfolio stabilizers such as income−producing real estate being another. Older people often feel a sense of embarrassment using such tools, and investors are similarly reluctant to take some of their chips of the table for social or psychological reasons. Βut for financial reasons, they should. Α tripod stands firmly, but the guy hopping on one foot eventually falls, and sometimes doesnt recover.

Many thanks to readers of this column who have taken my short survey. For those who haven’t yet done so, kindly click this link so I can improve our offering.

Please share your thoughts on this in our comments section. Meanwhile, below please find links to other advisor−related content on todays Seeking Αlpha.

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