Perception vs. Reality — Focus on What Matters
by Alan Skrainka , CFA
Chief Market Strategist
This is the time of year when all of the prognosticators attempt to predict what changes in the financial markets next year will bring. Investors look for guidance from economists, strategists and portfolio managers — hoping they know which asset classes, sectors or stock picks will be the next “big investment” in the coming year.
But before we ponder that question, let’s review the advice we received 12 months ago. Review the chart below and see if any of it sounds familiar.
Learn from the Past
So are you going to ask what the experts think will happen next year? Here’s an alternative approach.
Stop asking questions that have no answers.
No one can tell you where the Dow, oil prices or interest rates will be in 12 months. More importantly, we believe market performance over the next 12 months doesn’t matter if you plan to live at least 10 more years.
Ask questions that are important to achieving your long-term goals.
Some of these questions include:
Is my asset allocation suitable, given my long-term goals and tolerance for risk?
Do I own a balanced mix of investments?
Should I upgrade the quality of my investments?
Can I reduce my investment-related expenses, especially my tax bill?
Do I own enough investments that offer the potential to generate both reliable income and the potential for rising income in retirement?
Prediction Reality
Oil prices are headed to $100/barrel Oil prices slid back below $60.
A red-hot economy will benefit stocks most sensitive to economic growth versus so-called "defensive stocks." The red-hot economy cooled off.
Inflation worries will make gold, oil and other commodity prices race ahead. Inflation fears subsided.
Interest rates are headed higher. In a January 2006 survey, 97% of economists forecast higher rates
(Source: Bloomberg)
Interest rates fell back.
With worries about oil and the impact of Federal Reserve interest rate hikes, very few experts are enthusiastic about stocks or bonds, preferring "alternative" investments to "hedge" your risk, or real estate, or commodity-based investments. Dow Jones Industrial Average marched to new all-time highs.*
*Past performance is not an indication of future results.
Good Things Come in Threes
We’d like to offer three ideas that we hope will improve your odds of success in the coming year:
Investment Policy Is More Important than Security Selection - Investment policy refers to your asset allocation — the types of investments you own. Investment decisions that emphasize market timing and security selection are less important than your overall policy. Research shows that investment policy, for well-diversified investors, may account for 90% or more of an investor’s total return over long periods of time.1
Investor Behavior Drives Investment Performance - The best asset allocation policy in the world won’t matter much if you don’t stick to your long-term plan. Remember that stock market declines are normal, frequent and not a reason to sell quality investments. Usually, they present an opportunity for investors with long-term goals to purchase additional investments at attractive prices.
Investment Principles Trump Investment Predictions - Your investment decisions should be based on principles, not predictions. The three most important principles are:
Invest for the long term
Own quality investments
Properly diversify your investments2
Focusing on these principles should help you achieve your long-term financial goals.
It's About Principles, Not Predictions
Shifting political winds, geopolitical unrest, Federal Reserve and tax policy as well as the changing fortunes of specific industries can all have a short-term impact on the financial markets. However, efforts to anticipate these events and adjust our investments accordingly typically lead to higher transaction costs and lower returns over the long run.
What often passes for “investment advice” can be confusing, complex and ever-changing in the dynamic world in which we live. However, your Edward Jones investment representative can help you cut through the clutter and focus on what really matters. Contact your investment representative to schedule your appointment today.
1. “Determinants of Portfolio Performance,” Brinson, Hood, Beebower, Financial Analysts Journal July/August 1986
2. Diversification does not guarantee a profit, nor does it protect against loss.
