An election brings about a lot of uncertainty for investing. Investors are flooded with predictions and outlooks from every “expert” and market observer. In May 2015 I wrote in a similarly titled blog, “I believe we are in store for an even more volatile year in 2015 than we saw the past two years. Look for more conflicting data and opinions which can lead to polarizing opinions by analysts and confusion by advisors and clients alike. I think you will see market pundits and investors swing from strong optimism to strong pessimism (euphoria and panic) with regard to the markets – like we’re seeing with oil related companies the past few months.” The past 18 months certainly played out as such and clients are asking, what do I see next?
This is not a time to be investing without a plan or a strategy. Going on my 26th year as an investment advisor, my advice is to stay nimble. Staying nimble means to actively harvest gains after strong rallies, cut the cord if fundamentals negatively change, and keep some capital on hand to buy during panics. It’s wise to focus on companies you know and understand. So what is my plan of attack for weathering the possible onslaught of swings in the markets expected to play out? (everyone has their own specific situation, and these ideas may not be appropriate for all investors, but they should provide you with some perspective):
- Know your goal – I believe if you know what you own and why you own it, you can effectively manage any investment in your portfolio regardless of the market. When looking at a company determine the following:
- Did the quality of their product/service change?
- Did it decrease its position vs. their competitors?
- Did it change their balance sheet?
- Did the marketplace change for their product/service?
Let’s says I saw a suit in a store that I really wanted, but thought it was little pricey and knew there was a going to be a President’s Day sale, so I’d return to buy it then. But the next day this company announces several store closings in my area and had my suit marked down 40%. I examined the suit; it was my size, no damage to it, exactly as I wanted, only 40% cheaper. Did the suit change, no, but the situation around it did and I took advantage of it. Eighteen months ago I wrote that was how I then saw opportunities in oil & gas companies. Today I see similar opportunities in un-loved areas like Food and Biosciences, and I believe we may well see several “sales” in the overall markets during the next twelve months.
- Ignore the crowd – Emotions are the biggest obstacle I know to smart investing. In fact involving emotions with investing is like drinking and driving, a terrible mix. I do not listen to the media to direct investment decisions, and I advise you to do the same. By the time the media is reporting news it’s likely to have been factored into the markets and adds to the listener’s emotions. It’s not easy to buy when so many are screaming sell. A solid perspective can mean a world of difference.
- Use fear to your advantage – For monies that you want to have exposed to equities or highly-correlated equity investments target the investments you want to own and buy them on weakness. Although past performance does not guarantee future results, it is sometimes the case that when the markets experience a significant sell off or, even better for the buyer, when investors panic (i.e. August 1998, Nov. 2008, & Jan. 2016) it’s often the case that high quality investments drop right along with low quality investments and during a panic you can find high quality investments that did nothing wrong other than be guilty by association with the markets – the “baby out with the bath water” effect.
My forecast for the next twelve months, regardless of the election, is for wider and more frequent swings in the markets than what we’ve had the past two years. Don’t simply avoid the markets out of fear; likewise do not ignore your statements. Perspective can be everything. So if the markets sell off and you were fully invested then anxiety, anger and second-guessing are common reactions. Yet if you have cash available, a sell-off can make you feel like a “kid in a candy store.” Having a plan/strategy in place is not only important, it can help you navigate volatility and sleep more comfortably amidst the seeming chaos. Look to a fiduciary to help you develop a strategy for your situation.
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