Does The Billboard Top 10 Mean The Market Is Heading For A Crash?

November 24, 2017

In my 20 years or so as a financial planner, I’ve heard some pretty wacky theories about things and events that allegedly have an influence on the stock market. They all have interesting and catchy names too like the “Santa Claus Rally,” the “January Effect,” or the “Super Bowl Indicator.” According to market folklore, each of these seemingly unrelated conditions or outcomes is supposed to determine the future direction of the U.S. stock market.

For example, according to the Super Bowl Indicator, a win by the American Football Conference (AFC) team is supposed to bode negatively for the stock market in the coming year, whereas a win by the National Football Conference (NFC) team is supposed to foretell a rising stock market for the next twelve months or so.

Balderdash! Correlation does not indicate causation. Everyone knows that, right? Entertaining as those correlations might be, there isn’t much (okay nothing) in the way of practical scientific support to back them up.

Can Billboard predict the next market crash?

However, some new research suggests yet another seemingly unrelated indicator that may actually have a hint of scientific support behind it. According to recent research conducted by Dr. Philip Maymin, then assistant professor of finance and risk engineering at NYU’s Polytechnic Institute, the public’s choice regarding popular music may indeed be closely tied to forecasted movement within the U.S. stock market.

Based upon Dr. Maymin’s findings, people tend to prefer softer, calmer musical beats when they anticipate a more volatile stock market in the coming months and faster, livelier music in anticipation of calmer markets. He based these findings on observations of variance in standard deviation of returns for the S&P 500 index in comparison to average annual beat variance in songs tracked by the Billboard Top 100.

Market timing – investing with two left feet

If making your investment decisions based upon who wins the Super Bowl or whether the song in your head sounds more like “Despacito” or a Mariah Carey tune comes across as a rather silly way to manage your money, you are probably right. Imagine trying to dance at a club or wedding where the DJ changes songs every few seconds. Investment choices based on changing market conditions can feel the same way.

Nevertheless, investors of all stripes frequently do engage in attempts to time the market based upon their thoughts, feelings, fears, hopes, dreams, etc. regarding a whole host of events, including election outcomes, the weather, how long the market has been up or down, chitchat among coworkers, and more.

Humans, it seems, are just not wired to handle uncertainty very well, and investment markets are the definition of uncertainty as they can be down one day and up the next. Much has been and continues to be written regarding human psychology and the uncertainty of investment markets.

Even market trend timing guru Paul Merriman applies mechanical market trend timing strategies to only half of his own investment portfolio, and he is adamant that timing in general is not suitable for the majority of individual investors. As Mr. Merriman and I tend to agree based upon our collective experience, most investors lack the psychological fortitude, discipline, and stamina to stick to a timing strategy during periods of short-term financial losses that will inevitably happen.

Why? The simple fact is we hate to lose money, and when we see values drop, we feel obligated to do something, even when the best course of action is often to do nothing. As a result, market timing doesn’t work and often serves to do nothing more than make a bad decision even worse.

Stick with the same old song

As with dieting, exercising, and balancing your checkbook, there are no reliable shortcuts to success with disciplined long-term investing. Diversify your investments appropriately across stocks, bonds, and cash. Buy and hold even when it feels wrong and continue to invest regardless of whether the market is up or down that day. Be mindful of fees and commissions.

It’s not sexy and it doesn’t make for riveting conversation in the lunch room or around the water cooler, but a consistent, disciplined approach to your investments will ultimately leave you humming a much happier tune.

This post was originally published on Forbes.

Why You Shouldn’t Worry About Investing at the Top

August 03, 2017

Have you been seeing a lot of news articles lately about how the US stock market is overpriced and due for a decline soon? Of course, correctly timing the market is notoriously difficult. Not only do you have to know when to get out, you also need to know when to get back in. But what if the prognosticators are right and you’re unlucky enough to invest at the very peak of the market?

Getting it totally wrong

This article looked at what would have happened if a hypothetical investor had invested at all the wrong times over the last few decades: 1973 before a 48% decline in the S&P 500, September of 1987 just before a 34% crash, and then right before the 2000 and 2007 bubbles burst. Sounds pretty dismal, huh? It turns out that our spectacularly awful investor still would have earned a 9% average annualized return! That’s because they never sold and held the stocks until the eventual recoveries. So what can we learn from this?

You’re in it for the long haul

First, only invest if you can keep the money invested for the long run, ideally at least 5 years. Otherwise, you risk needing the money when your investments are down in value and you’re forced to sell at a loss. Any money you need in the next few years should stay someplace safe like a savings account instead.

Don’t put all your eggs in one basket

Second, be diversified. These results were based on investing in the stock market as a whole. An individual stock can go all the way to zero and never recover. It would take essentially the end of the world for that to happen to the entire stock market. In that case, your investments will be the least of your worries.

Ride out the storms

Finally, don’t sell during downturns. Stock market declines are inevitable and generally happen every few years. The key is to not let them affect your long term investment plan. Try to ignore them or even better, consider re-balancing your portfolio to make the declines actually work in your favor.

Take the plunge

This is another reason why I love investing. You can have the worst luck in the world and still come out doing pretty well. The key is to have patience. As they say, it’s time in the market, not timing the market that matters. So if you’re waiting for a market dip to get in, you could be wasting your time. Just do it!

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What’s the Market Going to Do Next?

April 28, 2017

One of the questions I’ve been getting asked A LOT recently is what I think the stock market is going to do. My usual answer is that it’s going to go up, and it’s going to go down. The only thing I don’t know is how much it will go in either direction or when the tide will turn. In essence, I’m useless when it comes to predicting the future movements of the stock market. That usually leads to a conversation around their retirement timeline, their ability/willingness to absorb losses in the stock market and their opinions about the future.

It was right after one of these calls that I read this story about a hedge fund manager who is giving back $1.25 BILLION in cash to the investors in his fund! That’s astounding, primarily because that’s over a billion dollars that the fund will no longer get paid a fee to manage. Even a small fee on over a billion dollars is a pretty big amount of money to give up.

Why is he doing this? He’s concerned that the stock market is overvalued and that he can’t find the right investments to buy in order to give his investors the type of returns he would like to provide. Now, let’s not shed any tears for him. He’s still got over $16 billion invested, and I’m pretty sure that’s enough to keep the lights on and food on the table.

But it is tangible evidence of someone believing that the stock market might be a bit overpriced right now. There are also managers who believe that the market, because of economic growth, job growth and corporate earnings – is poised to move upward for quite some time. (I’m still solidly in the camp of “I don’t know which way the market is going.”)

But whether the market goes up or down or sideways in the next few months to the next 3-5 years shouldn’t prompt you to take any action. The key to long term wealth building (and that’s why we all invest) is to pick a strategy and stick to it in good and bad markets. Investors who did nothing in response to the market collapse of 2008 were better off within a few years than the day before the crash. Those who moved everything out of stocks as the market tanked or after the market tanked may still not be whole.

The first thing you can do is to understand who you are as an investor. Here’s a quick investment risk quiz that can help you figure this out and gives you some hypothetical portfolios that might be appropriate for your particular risk tolerance. When your overall risk level changes due to changing time horizons, retirement goals, age, family circumstances, etc, it’s time to reallocate your long term investments.

When pressed for time, I ask a one question risk tolerance quiz. “On a scale from 1 to 10, where 1 is the most conservative investor in the world (money in the mattress) and 10 is the most aggressive (willing to put all of your money on a couple stocks and see what happens) – what number would you give yourself?” If someone answers 3 or 4 then 30-40% of their long term investment portfolio could be allocated toward high growth/high risk investments like stocks.

It’s by no means a comprehensive approach, but it has a very consistent answer with the other quiz above as well as other similar quizzes. In a former role, I had about a dozen clients take 5 or 6 different risk profile quizzes. They all came out with roughly the same answer and it was pretty darn close to the one question risk quiz.

So in spite of the fact that a hedge fund manager is giving back a big chunk of money to investors because he thinks the market is overvalued and other managers are incredibly optimistic about the markets moving forward, your goal as an investor is to understand who you are, get to an asset allocation that is consistent with your time lines and goals, and don’t get too high when things are good or too low when things are bad. From my experience, emotions are the enemy of good decision making and this applies to investing as well. Markets, like many things in life, are cyclical and if you’re patient and consistent, good things usually happen.

 

Why You Should Love Investing

April 13, 2017

When a lot of people think of financial planning, they think of investing…with dread. It sounds complicated, time consuming, and risky. But for me, investing is actually my favorite part of financial planning. Let me tell you why…

In most areas of life, we generally get what we put in, whether that’s in terms of the price we pay or the amount of time and hard work we expend. In other words, you get what you pay for. However, investing is the one area of life where you get rewarded for being both cheap and lazy.

Let’s start with the first step, which is diversification. As you’ve probably heard, you don’t want to put all your eggs in one basket, but you still have to decide how many of your “eggs” or money to put in each “basket” or asset class: stocks, bonds, cash, and real assets. What makes this confusing is that there’s a ton of conflicting views on this so investment expert Meb Faber decided to compare 9 of the top recommended asset allocation strategies by various other investment experts and see how they performed since the 1970s. What he found is that the difference between the best and the worst performing strategy was only 1.6% and if you removed the worst performing portfolio (which is an outlier since it only has 25% in stocks), the difference was only 1%. When he compared the models of the major financial institutions, he found that the difference was only about half a percent.

However, just because they ended up in similar places doesn’t mean that they performed similarly from year to year. Each of the models had many years in which they outperformed and many in which they under-performed. If you chose a model based on which was the top performing over the previous decade, you would actually have done much worse. Whether you use a one-stop shop asset allocation fund, a robo-advisor, one of the model portfolios listed in one of Faber’s blog posts above, or a financial advisor’s recommendation, which portfolio you pick is less important than that you pick one (to make sure you’re reasonably diversified) and stick with it through thick and thin. (Everyone, even Warren Buffett, has periods of under-performance.)

There’s one other way you can sabotage your returns: costs. It’s been estimated that the average mutual fund costs .9% a year in expenses and 1.44% a year in transaction costs. (This doesn’t even include any loads or commissions you may pay to purchase the fund.) That 2.34% would be enough to turn the best performing strategy into the worst.

It’s not like you’re getting anything for those costs either. In fact, a recent Morningstar study called low fund fees “the most proven predictor of future fund returns.” Warren Buffett has said the same thing. So as you choose which funds to use in your portfolio, look for ones with low fees (called the expense ratio) and low turnover (which leads to lower transaction costs). If index funds are available, they tend to have the lowest costs and hence tend to outperform more expensive actively managed funds over long periods of time.

The moral of the story is that investment success boils down to three simple rules:

  1. Be diversified. Pick a reasonably diversified portfolio. Don’t be a greedy pig (bet on individual stocks) or a fearful chicken (keep all your money in bonds and cash). After all, both pigs and chickens get slaughtered.
  2. Be cheap. Use low cost funds to implement your asset allocation strategy. In this case, you get what you don’t pay for.
  3. Be lazy. Once you have your portfolio, stick with it. Don’t try to time the market or otherwise, mess with it other than to rebalance it periodically back to the original allocation or to switch to lower cost funds as they become available.

Think about it. Where else are you most rewarded for being both cheap and lazy? Now do you love investing? If so, the first step is to save so you have something to invest, but that’s another story…

 

Is the Stock Market Too High to Invest?

May 23, 2013

Usually when I talk about investment mistakes, I refer to what is known as the “greed, hope, and fear” cycle. This is the well-known tendency of investors to invest more aggressively when the stock market is doing well, hope it will come back when the market begins its inevitable downturn, and then eventually sell near the bottom out of sell fear. Investors are then typically reluctant to get back in until things “settle down,” which means when the market has gone up for an extended period of time and is possibly nearing another high point. This causes investors to buy high and sell low, the opposite of what you want to do.   Continue reading “Is the Stock Market Too High to Invest?”