A couple of weeks ago the Barron’s Striking Price column included the following related to the December FOMC meeting;
The rate hike is one of those events that has to be traded, no matter what. No portfolio manager wants to sit on the sideline and miss what could be a big move in the market.
The context was probably not aimed at investment advisors but that is unclear and of course the many individual investors who also read Barron’s could be influenced by that sort of sentiment as well.
The reality is that the above is going to be bad advice for a lot of market participants.
There are two obvious scenarios where investors have their clearest thoughts about how to construct and then manage a portfolio. The first is when the portfolio is initially constructed. At that point they are concerned with proper asset allocation, a disciplined strategy and a time horizon suitable to their investment objective.
The other obvious scenario where investors have their clearest thoughts is immediately after realizing they made a mistake, behavioral or otherwise. To the Barron’s quote the more events that have to be traded no matter what the more potential mistakes, IE deviations away from the time when the focus was proper asset allocation, a disciplined strategy and a time horizon suitable to their investment objective, an investor is likely to make.
Last week, the week of the FOMC announcement, the S&P 500 Index had a very volatile ride to a decline of just 27 basis points. Thinking back to proper asset allocation, a disciplined strategy and a time horizon suitable to their investment objective is there any scenario where financial plan success hinders on that one week?
There’s one scenario, one where someone does something that seemed like a good idea before the FOMC announcement that turned out to be a huge mistake involving VIX products or index options. There is no long term investment plan for individuals or advisory clients that involves speculating on the outcome of an FOMC announcement, or an ECB announcement or a single jobs report or some other event viewed as significant with some level of uncertainty over the near term outcome.
My favorite historical example of this is from the summer of 2002 when CEOs where going to be required to sign off on their company’s earnings reports and be held accountable for any fraudulent reporting. I’ve mentioned this example a few times before for the terror it engendered. The market bottomed a couple of months later and I may be the only one to still write about it but this was a “big deal.”
Hindsight bias kicked in long ago over the great recession. That’s probably because the S&P 500 is about 33% above its pre-great recession high having left that high behind almost three years ago. The person whose strategy was to buy and hold and actually did it through the great recession, continuing to add to their savings along the way, is likely just fine.
Performance matters but it matters more for mutual fund managers. The objective of individual investors and the advisors that help them is to have enough money they need it. Savings rates, proper asset allocation, lifestyle and not succumbing to emotion like the temptation to speculate on events that will soon be forgotten will be larger determining factors than performance.