Ruminations on Market Direction

A few weeks ago a prospective client called our office and was looking for help in a few different areas. One of those areas was advice on investment selection and asset allocation. Initially, the individual seemed like they may be a good fit. The individual was mentioning long-term time frames, buy and hold, value, and other terminology that seemed in-line with our firm’s investment philosophy.

Then just a few minutes after exclaiming all of that, the individual then mentioned that they were looking for someone who could tell them “what kind of a market we were in” on an ongoing basis. I paused briefly and asked what the individual meant. They told me that they were looking for someone to tell them if we were currently in a growth market, value market, etc.

Immediately I knew that this potential relationship would not be coming to fruition. Politely, I told the individual that if they ever found someone who could accurately tell what kind of market we were in to let me know. I wanted in on that too!

The reality of the situation and what the individual wanted is that it’s nearly impossible to tell what kind of market we’re in. There may be lucky guesses from time to time – but they are just that – guesses. And, if anyone could accurately and repeatedly guess what kind of market we were in, where it was headed, etc., they would be one wealthy individual and would certainly not be sharing that skill with anyone else.

My best guess is that we’re currently and will always be in a stock market, a volatile market, and an uncertain market. Can I say that over long periods of time that the market generally goes up? Yes. Is it without risk, uncertainty, and turmoil? No. Will there be times (and certainly long time frames) of downs and suboptimal outcomes? Yes.

They key to stomaching all of the uncertainty and volatility is to determine what your time frame is, what the goals for your investing are, and then choose an asset allocation that provides the best fit. Generally, this means buying and allocating among low-cost index funds. With index funds individuals can buy and hold the index in many different markets such as stocks, bonds, international, real estate, etc.

Individuals that are more conservative don’t have to invest aggressively, but they may need to invest more to make up for expected lower returns from the conservative portfolio. Additionally, investors that are aggressive need to understand that they must remain aggressively invested even when times look or are bad. As during down times their portfolios will lose more than conservative investors.

And when markets are going down and fear and panic are starting to take hold of investors, individuals need to remain calm, remember their goals and time frame, and do everything in their power to resist the urge to sell. In fact, they should consider buying more – since prices are dropping and have fallen. Easy in theory, extremely difficult in reality (see our “Hot Stove” post).

It is impossible to tell where markets are going. So making predictions on their direction is frivolous. Instead, investors can focus on what they can control – their emotions, their asset allocation, their expenses and their goals. Markets will be markets and will continue to provide volatility and uncertainty. Perhaps that is the only thing we can predict.