2016 was the year of surprises. Conventional wisdom and expectations were mostly proven wrong. Think about the following events. It was common knowledge that the Britain vote to leave the European Union would fail. Common knowledge was wrong. At the beginning of 2016, all major investment firms suggested loading up on European stocks and reducing domestic exposure. They were proven wrong. Many of the same firms recommended investing in large U.S. companies over small companies. They were wrong. The polls and broadcast media told us the U.S. presidential election options were two: whether Clinton would win by a small amount or by a landslide. The polls and media were totally wrong, and they are still blaming everything and everyone else but themselves.
Economists, investment experts, and the media agreed that a Trump victory would mean a market crash. We may indeed see a crash, but almost two months since the election, the experts have missed it again. At the beginning of the year, most expectations were for the Fed to increase interest rates at least twice, perhaps three times. Expectations were wrong. Despite less than stellar economic readings, the Fed raised rates in December, some believe more to save face than anything else.
My own ability to predict the future is no better than anyone else’s. One of my study groups does annual predictions of key economic items. For 2016, I thought the S&P 500 would rise 4%, gold would end the year at $1,200 and oil at $50. The 10-year Treasury would be at 2.75%, the CPI would be up 1.80%, unemployment at 5%. And, worst of all, I thought EAFE would gain 10%. I may win one of those seven categories. Our clients frequently ask if they should buy into a sector or get out of an asset class. The assumption is that since I and my colleagues are career advisors, we have the ability to see what others do not. Fortunately, we use globally diversified mixes of stocks, bonds, and alternatives for our clients, and we don’t base allocations on our annual predictions.
2017 will bring another batch of common knowledge, broadcast media predictions, and sure things from economic and investment gurus. We are already inundated with Top 10 Predictions, and we will like those that match our biases, just as we dismiss those that are not in line with our biases. If history is any guide, most predictions will be wrong, again. The problem with investment predictions is that what ought to happen (because of valuations, economic outlook, politics, and theory) seldom does happen. Take international stocks, for example. Domestic has out-performed international for a near record number of months and years, valuations are mostly low to cheap, so surely the EAFE will beat the S&P 500! I have been expecting this for many months and am still waiting. The MFO Discussion Board always has a good number of threads attempting to anticipate “where to invest now”, just like the retail magazines.
At the end of 2015 and into early 2016, many pundits and investors had pulled most of their dollars out of emerging market stocks. After all, EM stocks as a whole had a lousy 3-year record compared to the S&P 500. And, of course, emerging market stocks had a rip-roaring 2016, beating the S&P 500 during the first three quarters of the year 16.5% to 7.5%. Then everyone jumped on the bandwagon, saying EM was where investors should move their money. As usual, the experts were late to the party.
Expectations of higher interest rates have hurt values of long-maturity bonds, especially long-term Treasuries, which lost almost 13% in the last three months. But only recently have pundits glommed onto this reality. We have favored short-duration bonds for some time, and this hurt performance numbers a bit in the last couple of years, but we have never liked taking much risk with fixed-income. Common knowledge, and our hope, is that the December Fed rate increase of 0.25% is followed by other 0.25% increases and not bigger jumps.
There is very little we can control with investments. Expenses are certainly one thing, and this is especially true now with bonds. And we have some ability to control the amount of risk we have in our portfolios. But we certainly have no control over economics, global politics, interest rates, and current events. A diversified investment allocation remains a solid strategy for most investors. Domestic and global events will happen, and some changes to portfolios will be needed. But chasing performance and investing based on prediction are almost always losing games. Remember one thing above all else when it comes to investing: There is risk in everything. Be sure your portfolio’s allocation matches your goals, your cash flow needs, and gives you some measure of assurance.
And remember that today’s headlines and tomorrow’s reality are seldom the same.