I Know You Can’t Predict The Future, But…. | SJS Investment Services

I Know You Can’t Predict The Future, But….

August 27, 2020

Client investment meetingBy SJS Senior Advisor & Director of Institutional Investment Management Kirk Ludwig, CFIP, AIF®

It’s human nature to ponder what the future holds and what it means to your investments. As the market grapples to understand the long-term implications of the COVID-19 pandemic, global trade, elections or (fill in the blank), the market continually factors known information into today’s prices, whether we understand all of the underlying factors, or not.[1] With so many variables influencing future market movements, it is a challenge to predict how the markets will respond…yet, investors still try to speculate on what happens next…we can’t help it, it’s our nature!

During periods of great uncertainty, markets can change course quickly, creating high volatility while the markets reprice risk. These periods, like we are experiencing in 2020, can be very perplexing to understand. How can stocks move higher when the future seems so uncertain? Are historically low interest rates signaling slow growth and low inflation for many years to come? What does the rise in the price of gold signal to the markets? These types of questions are endless.

Think of the market like a sports gambling bookmaker. If you were to place a bet on the outcome of a professional sporting event, you’d likely research who has home team advantage, injury lists, top player stats, and all the other factors which may give one team an advantage over the other. The bookmaker, and all the other gamblers, are aware of these same advantages. In order to even the playing field, the bookmaker will create a “spread”, giving the underdog extra points to compensate for these differences. At this point, you’re no longer betting on who wins, but you’re betting on if the spread is correct or not. This is much more difficult to predict!

The stock market, like the sports gambling bookmaker, is always handicapping all known information.

The stock market, like the bookmaker, is always handicapping all known information. If you’re increasing or decreasing your risk exposure to stocks based on how you believe the current news will impact your investments, know that the market has already priced in these factors. What you’re really betting on is if your expectation is different than what the entire market, on average, is expecting. Again, a much more difficult prediction.

We don’t think that an investment strategy should be built on speculating if the market is accurately reflecting future expectations. More importantly, we think investors should reflect on how their investment strategy is positioned to meet their long-term desired outcomes based on long-term patterns.

At SJS, we focus our attention on the process and design. We develop portfolios to match the risk and return expectations of our clients through broad global diversification with the proper balance of growth and stability to match their long-term goals. We believe design matters most. Having the appropriate exposures to multiple asset classes and market factors improves the likelihood of a successful investment plan and removes the temptation to speculate on current events.[2][3]

If you would like to learn more about how to design your investment portfolio, feel free to reach out to us. We are always here to listen and assist!

Focus on investment portfolio design and implementation.


Important Disclosure Information and Sources:

[1] “Eugene F. Fama, efficient markets, and the Nobel Prize.” John Cochrane, 20-May-2014, Chicago Booth Review.

[2] Unconventional Success: A Fundamental Approach to Personal Investment. David Swensen, 2005, Free Press.

[3] MarketPlus Investing® models consist of institutional quality mutual funds. Mutual fund investment values will fluctuate, and shares, when redeemed, may be worth more or less than original cost.

Advisory services are provided by SJS Investment Services, a registered investment advisor (RIA) with the SEC. Registration does not imply a certain level of skill or training. This material has been prepared for informational purposes only.

There is no guarantee investment strategies will be successful. Past performance is no guarantee of future results. Diversification neither assures a profit nor guarantees against a loss in a declining market.