Editor’s Note: According to Alexander Green, editor of our sister e-letter Liberty Through Wealth, attempting to predict the future is a mug’s game.
But you would expect a seasoned financial expert to try to make predictions, right?
Alex’s consistently market-beating approach focuses on two things: asset allocation and picking the right stocks. Read on to see what he has to say.
And if you’re interested in learning more about one of his favorite investment strategies, click here to register for Alex’s upcoming webinar hosted by longtime Oxford Club Member Bill O’Reilly on April 22.
– Mable Buchanan, Assistant Managing Editor
It’s certainly been an interesting year for the stock market.
We saw the S&P 500 hit a new all-time high. We saw the Dow’s biggest daily point drop – and gain – in history. And it’s only April.
What would investors be doing with their money today if the market had been flat the last five months? Probably something different from what they’re contemplating today.
Why did the market keel over?
We all know the backstory by now. Investors initially felt assured that the coronavirus outbreak in China would be contained.
Now we know that was wrong.
Don’t waste a minute listening to health or financial experts telling you how long this pandemic will last. That’s all guesswork.
With many states giving shelter-in-place orders, consumers are stuck at home and spending less. If customers spend less, businesses will spend less too.
And if everyone spends less, corporate profits will fall. The stock market is all about the future direction of profits.
What should you do now?
I’ll reveal the unvarnished truth. However, it’s a bitter truth you may not want to hear: No one knows.
That may sound disappointing – or just plain odd – coming from someone who provides investment research for a living.
After all, people in my business are supposed to have strong, well-reasoned opinions about economic growth, inflation, interest rates, currency values, commodity prices and the outlook for the market.
The problem is that those opinions are worth exactly what you pay to hear them: nothing.
Why? Because economic forecasting and market timing can’t be done accurately and consistently and, therefore, don’t add value.
Let’s take a short trip down memory lane…
A decade ago – with the nation having just undergone the worst economic downturn since the Great Depression – who predicted that we were at the beginning of the longest economic expansion in U.S. history?
No one. Economic pessimism was rampant.
Since the market had already taken a significant bounce off the bottom in 2009, who predicted at the beginning of 2010 that large cap stocks would more than triple and small cap stocks would more than quadruple in the decade ahead?
No one. Instead, the widespread consensus was that investors needed to adjust to “the new normal,” far-below-average stock market returns going forward.
A decade ago, with interest rates near zero, who predicted that 10 years later rates would be negative on more than $14 trillion worth of global bonds?
No one. Instead, the dominant view was that ultra-low rates were a short-term aberration and investors should expect them to quickly “normalize” (i.e., return to historically higher levels).
Another dud forecast. Good thing we didn’t buy into any of them.
At this point, some investors will say, “Well of course no one knows for certain how the economy and the financial markets will perform, but you have to guess.”
No. You don’t have to guess. That’s my whole point.
You want to avoid guesswork as much as possible and use an approach that gives you the highest probability of success.
How? By asking a fundamental question that is at the heart of sophisticated investing: “Given that no one can tell me with any certainty what the economy or markets will do, how should I run my money?”
Here is the answer based on my 35 years’ experience as a portfolio manager, investment analyst and financial writer:
1. You adopt an asset allocation that allows you to capitalize on the uncertainty inherent in financial markets.
2. You outperform the market not by correctly predicting its short-term movements – a mug’s game that no one wins – but by selecting and owning companies that give substantially higher returns.
Longtime readers understand my agnostic approach to the future – and the market-beating success we’ve had with it.
However, some of you might benefit from a primer. So here it is…
I do not recommend stocks because the economy is strong, corporate earnings are up, taxes are down, the market is in an uptrend or Donald Trump is in the White House.
I recommend stocks because more than two centuries of financial history demonstrate that a diversified portfolio of common stocks – or, better yet, uncommonly good stocks – is the best way to grow your wealth and protect it from the ravages of inflation.
The trade-off for these much-higher-than-average returns is that equity investors have to endure occasional and unpredictable bouts of neck-snapping volatility.
(See 2007 through 2008 for details.)
However, a broadly diversified portfolio lessens your risk and volatility. So does asset allocation. (That means spreading your investment capital among non-correlated asset classes, including high-yield and high-grade bonds, real estate investment trusts, and Treasury Inflation-Protected Securities.)
To further reduce your downside, I recommend trailing stops behind most individual stock positions.
The important thing to recognize is that, while the economy and the market will often surprise you, stocks are the greatest wealth creator of all time.
And if you buy quality, asset allocate properly, diversify broadly, reduce your investment costs and minimize Uncle Sam’s tax bite, you’ll do just fine.
Moreover, when the going does get rough – as it will from time to time – Marc and I will be here to remind our readers of first principles… and talk you off the ledge, if necessary.