wall street

This Is How We Invest, and Why—Part Two: Don’t Try to Outguess the Market

The lady on the television screen seemed very smart. She had an impressive educational background and lots of experience as an analyst for a Wall Street investment firm. She was also very persuasive as she stated her case to the CNBC host that, based on her analysis of the data, the stock price of the company they were discussing was primed for a big increase.

The gentleman on the screen also seemed to be very smart. He had an equally impressive educational background and similar experience as an analyst for a different Wall Street investment firm. And he was equally persuasive as he told the same CNBC host that, based on his interpretation of the data, he was convinced the stock price of the same company would decline.

Both analysts gave their opinions within the same segment of a CNBC morning show. Both were likable and seemed to be honest and well-intentioned. And, based upon the way they presented their argument, they certainly believed in their interpretation of the data. But they obviously both could not be correct.

This scenario plays out almost every day in the world of investing. Whether the analysts are discussing a company, a sector of the economy, an asset class, or the overall market, there are always differing opinions. So, as an investor, what should you do?

Our advice? Don’t watch. If you must watch, make sure you do so for entertainment purposes only.

In Part One of our series that explains How We Invest, and Why, we discussed the efficiency of the markets and how the first step in our process is to acknowledge that we don’t know more than “the market.” When a Wall Street investment firm, or an investment manager, makes a prediction about the price of a security, an asset class, or the market, they are making a claim that they know more.

We don’t believe that they do, and we believe that their directional calls are nothing more than guesses.

This leads to the second building block in our investment process: Don’t try to outguess the market. The pricing power of the market works against investment managers who try to outsmart other market participants through stock picking or market timing. Over the 15 years ending December 2016, 82% of all U.S. mutual funds trailed their respective benchmark. An investor is better off owning the benchmark, via a low-cost index fund, and not paying the high cost of having a manager trying to pick stocks or time the market.

It’s not easy holding this view. Wall Street wants you to think that the millions of dollars that they spend on fund managers and research departments can give you an edge if you invest with their firm. And they spend millions more on advertising that tries to convince you of that “fact.” But remember, every time you, or your fund manager, makes an investment move based on their research (i.e., guesses), you face transaction costs and possible tax consequences that can negatively affect the return of your investment portfolio.

We believe, and the evidence confirms, that a much better and less costly way to invest is to own a globally diversified portfolio using asset-class-based mutual funds or exchange-traded funds (ETFs). Don’t try to guess which company is going to be better than another. Own them all. Don’t try to guess which country around the world will be the next “winner.” Own them all. By owning them all through diversified funds, you can take the guesswork out of the investment process. And you will also reduce your portfolio risk in the process.

Big News Story! What Should You Do With Your Portfolio?

In case you haven’t heard, there’s been some pretty big news on the political front recently. Last week, we heard about President Trump’s tax proposal. This week, we learned that the GOP-controlled House of Representatives passed their version of a healthcare bill to repeal and/or replace Obamacare.

It certainly didn’t take long for the Wall Street machine to kick in. I saw several articles over the next couple of days suggesting how you should be positioning your portfolio as a result of the new tax laws. I also saw several more articles that suggested what companies you should be buying (or selling) in anticipation of the changes coming in the healthcare industry.

These Bills May Not Even Pass

Don’t you think they’re a little premature? The President’s tax plan is just a proposal…with a lot of politics baked in. The last time I checked, the President doesn’t make the laws—Congress does. With the state of our politics as they are today, there is no way that the President’s proposal will make it through one, let alone two, houses of Congress without some major negotiated changes. It’s nearly the same story with the healthcare bill. It passed through the House of Representatives by the absolute thinnest of margins. The chances that it will survive a Senate vote in its current form are slim to none.

Trying to make moves in your portfolio to take advantage of changes resulting from pending tax and healthcare bills just seems a bit premature, especially since there is no certainty at all that these bills will be passed. Not only are the articles a bit premature, I would also say they are a bit (or maybe a lot) misguided.

Follow the Evidence, Not the Speculations

When it comes to investing, we follow an evidence-based strategy. That simply means that we don’t believe that anyone can accurately predict what is going to happen in the markets, and the evidence proves this. Even the best and brightest minds on Wall Street, armed with the latest and greatest technology to help them analyze an endless stream of data, cannot agree on the direction of the markets or individual securities. That’s why we don’t try to forecast. We can’t afford to play that game with the assets entrusted to us by our clients.

Yet that’s the game that Wall Street wants you to play. They want you to think you can take advantage of some piece of information that will give you an edge over everyone else. Why? Because every time you reposition your portfolio by buying or selling a security, Wall Street makes money…whether you do or not.

We don’t believe it will do you or your portfolio any good to try to act on new stories or the articles that inevitably follow. After all, in the world we live in today, with information traveling around the globe in milliseconds, there is no information advantage anymore—if there ever was.

A better strategy is to build a globally-diversified portfolio and ignore all the noise that is the news, as well as the articles suggesting how to react to that news.