Doom and Gloom This Was The Year That Was

With Apologies To The Late David Frost

by Fred Taylor

I’ve written many times, over the years, regarding the worthlessness of the media — much less the pundits that they quote — regarding prognosticating the future. This applies whether their prognostications are positive or negative — the damage done to investors’ psyches (much less their investment accounts) tends to create either an ongoing case of angst or euphoria. Given the instincts and emotions that have allowed us to survive the millennia as a species, depending upon which phase of the moon is upon us or which phase of the investment cycle, investors seem to vacillate back and forth between celebrating with that expensive bottle of Dom or running to the medicine cabinet for another dram of Maalox. Don’t feel guilty in either case — that’s just part of being human.

2013 represented one of those years where a Mae West market (“too much of a good thing is wonderful”) found investors uneasy and constantly looking over their shoulders for the impending disaster that was sure to strike them. Investors, even those who had been disciplined to stay the course and who were reaping the substantial rewards found themselves in an ongoing state of unease. Of course, these instincts and emotions were eagerly fanned and fed by the financial services industry charlatans and their handmaidens in the media.

After years of outflows from the markets and the incessant drum beating by the financial services industry to invest anywhere but equities (oops, sorry, guess we missed the bull market), it finally dawned upon them that the markets have been in on upward march since March of 2009. Of course, after missing out on the delivered returns over the last few years, they finally decided that four years into a new bull market that it was “safe” to move back into stocks and we’ve seen inflows into equities over the last six months. What is truly amazing is that people actually pay for this kind of advice — either with fees or commissions. What investors never seem to realize is that while focusing on internal costs of investing and whether the market is going up or down, one of the highest costs of investing is the cost of “lost opportunity,” of returns never realized because they were out of the market when the positive returns were being delivered.

The reality was that this was such a good market that likely a trained chimpanzee, throwing darts at the stock market page of the paper could probably have done quite well. So, no kudos to any of the market mavens paraded in front of us either in the electronic or print media or even the touts out on the internet. Clearly, the biggest winner was the market itself — which, over the long-term, it usually is!

Now, before any of our investors or friends go around patting themselves on the back or start bragging at their local cocktail parties about how smart they were, truly a word of caution: while we preached, during the “bad times,” that those times don’t last forever and that it is necessary to stay disciplined and to stay the course, similarly, neither do the “good times” last forever. This does not mean that doom and gloom is right around the corner — I’m not smart enough to be able predict with any accuracy or correct timing when market corrections or even bear markets are going to occur. It could be next week, next month, next year or a few more years out. Nevertheless, it is prudent to be mentally prepared for those times when markets correct, fall and equity prices erode. Our instincts and emotions will be telling us that maybe this would be a good time to sell out and head for the sidelines or some other supposedly “safe” investment. The media will be telling that to us and most in the financial services industry will be facilitating this behavior — but not us. This is where the discipline and knowing both what you are doing and why comes into play. You have to understand that bad markets and volatility are the price that we pay for the long-term positive returns that the equity markets deliver and you have to be willing to pay that price if you want those long-term returns. Harry Truman had it exactly writh when he observed: “if you can’t stand the heat, get out of the kitchen!”

So, while we’ve enjoyed the good times of the past year and years, lets keep a cool perspective about the future in front of us and remember that it is, essentially, unknown. The future will be what the future will be and we will stay disciplined, diversified with portfolios rebalanced and continue to add to our knowledge of how markets really work and how we need to properly respond to them for a long-term positive investment experience.

Copyright (c) 2013 Frederick C. Taylor All Rights Reserved
Permission granted to share or distribute — with attribution.

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