L.I.V.E.'ing Through Market Storms- Allocating to Survive & Thrive
We discuss how our L.I.V.E. framework is not just helpful in understanding the interconnected trade-offs one must make, but as an allocation tool for prioritizing items in the portfolio construction process.
FIVE THINGS YOU SHOULD KNOW
Key Insight – [VIDEO] We discuss how our L.I.V.E. framework is not just helpful in understanding the interconnected trade-offs one must make, but as an allocation tool for prioritizing items in the portfolio construction process. [ARTICLE] We discuss the real purpose of an advisor, including a guest article on picking the right advisor, along with some updated information to help prepare you for what might lie ahead.
INSIGHTS for INVESTORS
“So where do you think the market goes from here?” – Investors in 2022
Intro – What’s an Advisor’s real job?
It is completely natural to want to know “what comes next”, especially when it relates to something important to you like your finances. The “compulsion” to “know” is VERY strong. So strong that it leads many to fall for all sorts of sales pitches and strategies that time and time again they come to regret.
Of course, many in the industry know of this compulsion and play into it for their benefit not yours.
Ego, lack of mission, ignorance and old-fashioned greed… are just some of the reasons we see so-called advisors trying to sell investors on the idea that they can add value through stock-picking or market timing despite the totality of evidence showing the futility/damage of such attempts (see article from DFA funds below).
While there are few institutions/teams that add value in certain asset classes, the idea that your local firm is acting as a true advisor to you, while also delivering market beating results through stock picking large cap U.S. stocks and/or market timing is laughable at best, and malpractice/dishonest at worst.
Your advisor’s job is to help you plan your financial future, not waste their time and energy trying to predict the market’s future.
Does this mean that there is nothing to be done? And why spend time writing these commentaries each week?
As to the first question, there is A LOT to be done from determining your goals, the plan to get you there and the investment allocation that both a) will help you reach those goals, while b) fitting within your emotional risk budget. Once established it’s critical to adapt those plans and rebalance those portfolios to keep you on track with ever changing lives and markets. That’s the role of an advisor.
Along with … communication.
As to the second question regarding why write these commentaries, analyzing data and markets is far more about preparation and has little to do with attempting prediction.
When we are prepared about the range of most probable outcomes, we are better prepared emotionally to withstand them, and in so doing reduce our chances of making decisions from an emotionally charged place or state.
Such efforts, often wrapped up within behavioral finance, have been found to add up to 2.0% annually over time. (See https://advisors.vanguard.com/iwe/pdf/IARCQAA.pdf)
As we watch (yet again) people getting financially destroyed from get-rich quick schemes like crypto and profit-less tech stocks and SPAC’s we are reminded of both the allure of such “magic pills” as well as the necessity to avoid them by defining your purposes, investing in the plan and staying disciplined in your portfolio with the help of good partner.
With each of those in place your emotions will be tied to your story, not the market’s daily fluctuations thus giving you a real chance at meaningful success. This is our process and purpose here at TEN.
Some Quicks Thoughts for Preparing for What My Lie Ahead
As a bear market drags on, such as the one we have now, people naturally get “antsy” for it to end. Leading to many whipsaws in the market. As obvious as it is to say, most investors don’t internalize the fact, that markets do not announce tops or signal “all-clears” at the bottom – both are processes not points.
In addition to geopolitical issues around Russia/Ukraine and China’s continuation of its Zero-Covid policy, the (not unrelated) global issue of inflation remains at the front of the market’s mind.
Where do things look today? In general, the improvement we told you would likely arrive in Q4 appears to finally be here.
As noted by JPMorgan, “After peaking at 9.1% y/y in June, inflation has slowly been receding. The October CPI report confirmed this trajectory as headline CPI surprised to the downside at 7.7% y/y – its smallest y/y increase since January. Core CPI also moderated to 6.3% y/y, down from 6.6% y/y in September. We are seeing gathering evidence of disinflationary forces at play, the most notable being a cooling economy and improving supply chains. First, the Fed’s aggressive rate hikes appear to be working and October’s CPI report should give the Fed confidence to slow to 50 bps in December. Second, easing supply chains are acting as disinflationary tailwinds for core goods. In January 2022, there were 100+ ships waiting to get into the Port of Los Angeles. Now, it hovers below 10 – a welcome sign of collapsing bottlenecks.” (see accompanying chart)
The team at Alpine Macro issued a similar outlook stating that “U.S. inflation is likely to move sharply lower in 2023 based on the combination of demand destruction and the easing of supply constraints. Supply-driven inflation was sticky through the first half of the year, but demand-driven inflation has already come down a lot. Now, forward-looking supply drivers of inflation – delivery times, order backlogs, the NY Fed’s global supply chain index, freight volumes, and shipping rates – are all melting. Housing is already in recession, so the elevated contribution of shelter costs to overall inflation is poised to slow quickly. The labor market’s leading indicators are also softening (jobs plentiful/hard to get) which should translate to cooler wage growth and lower service sector inflation on a 3-6 month basis. Longer term, the structural outlook for muted inflation is unlikely changed from the pre-Covid world, because the latest surge was fiscally-driven, a policy bias that is now reversing. The secular growth outlook – driven by weak labor force growth and low productivity growth – is unlikely to reverse the underlying tendency toward excess savings which is disinflationary.
All the leading economic indicators of growth are weakening. The inverted yield curve corroborates the recession signal. That said, recession is likely to be mild because there are no major balance sheet excesses in the private sector.
The path to a soft landing (skirting recession) is very narrow, because it is difficult to envision tight financial conditions engineering a decline in hiring (rebalancing of the job openings to seekers ratio) that doesn’t lead to a rise in unemployment.”
Ultimately, we see the current environment as a pretty typical cycle. Money gets cheap, assets begin to move, people get greedy and make poor/risky/levered choices pushing them to unsustainable heights. Markets pull back leading those investors to lose a lot of money. People blame the Fed to the point they back off their rate hikes and people do it all over again. Not us, mind you.