I get a lot of questions each and every day about what the stock market is going to do. So, today I wanted to talk about my 5 stock market predictions for this year (and believe me, they’re not what you think).
But, before I move into my predictions, let me give you a word of caution. As I was re-reading through this article, I could see how the things I was going to discuss could come across as a beat-down of sorts. It’s not!
I do not question investors’ intelligence. In fact, if anything, I believe that you are so much more knowledgeable than most of the media and financial industry gives you credit for.
I’ve just seen too many things go wrong in investors portfolios and I have to share with you what I think will help you become a better investors.
But, it is that time of year. Where the so called “financial experts” will attempt to convince you that they really know what the stock market is going to do. And, that somehow they have managed to get their hands on a crystal ball. You’ll see the the news reports, the magazine headlines, and the financial entertainers making sensational claims about their ability to pick, predict, and promise what is going to happen in the stock market. After all, their livelihood depends on their ability to make you believe they know what they’re talking about.
So in an attempt to bring some clarity and reason to this otherwise empty promise of stock market know-how, let me give you 5 insights into what is really going to happen to the market and investors in 2015.
(1) The Stock Market Will Go Up and Down
I know that this isn’t quite the revelation that you were hoping for but the truth is never really that glamorous.
I can’t tell you how often I am asked what the stock market is going to do today, this week, or this year. If I am truly being honest, the answer that I have to give is, “I don’t know.”
That being said, and history tends to agree, that the market goes up more than it goes down. The key to successful investing is focusing on a long-term strategy so that short-term price volatility does not impact the decisions that you are making.
There has really been more of an awareness over the past several years about all the things wrong with what is called active management. At the end of the day, actively managed portfolios all rely on the ability of you or your advisor to speculate (or guess correctly). The problem with that line of think is that it cannot be done consistently.
So, rather than try to guess, it’s better to own a properly diversified portfolio and leave it alone! Leave it there for 10 years, 20 years, 30 years. History will show that those who own investments over long periods of time tend to get better results than those that don’t.
I had a client that I started working with last year that asked me if I was going to call him if the stock market went down significantly in any given day. My answer was “No, would you like me to?” His answer was “yes, I want to make sure that you’re doing your job.” “What would you like me to tell you?” I said “That you’re going to be making some changes to update our portfolio based on the market.” I then told him “that I’d be lying if I said that to you.”
I encourage you not to make changes in your portfolio because of what the market did today, this week, or even this month.
(2) Some Asset Class Categories Will Perform Better Than Others
Again, probably not the insight that you were looking for today but these 5 predictions are going to be the only 2015 stock market predictions that are going to be right, so hang with me on this.
I often hear investors say that the market did well this year or the market did poorly. But very rare is the case where the entire market went south or north. More realistically, certain asset categories moved differently from each other-some up, some down.
This is why it’s so important to own a broadly diversified portfolio (Large U.S. stocks, mid-cap stocks, small stocks, value stocks, international stock, emerging markets, fixed income.
What you want in your portfolio is what is referred to as non-correlated assets. Basically that means that the categories move independently of each other. If one category goes up, the other may go down.
Most people don’t want to do this because they always want to be in the one that goes up. But let me remind you, that is impossible to do consistently and you will get burned. 3 great examples: Tech Bubble from the late 90s to early 2000s, the real estate bubble of 2008, 2009, the commodities bubble around the same time. But this isn’t new. In fact, from 1634-1637, there was a Tulip and Bulb Craze. People were literally trading land, life savings, and everything else they could to get their hands on more tulip bulbs. I bet you can guess what happened.
(3) Investors Will Become Fearful/Investors Will Get Greedy
This is not uncommon and it happened in a larger degree in 2008 and 2009 than it has in almost 90 years. It’s human nature to do it. Human nature, by the way, is the reason that is so difficult to invest successfully. We see the returns that are available and yet, investors aren’t realizing the same returns.
There’s a popular study out there by DALBAR that states that investors tend to earn half of the returns that the market gives. Why is that? Why is that we lose half of the power of our investment earnings?
I would submit that it has to do with human nature. We want to be winners, not losers! This line of thinking carries over into the way that we invest. When we open our statements, and see that a certain type of stock did very well this quarter or this year, like the S&P 500 (500 Large U.S. Stocks), we want to invest more in that. When we look at the same statement and see that international stocks, for example did poorly we want to get rid of those.
You and I both know that is the opposite of what we should do, right? You know that. You know to buy low, sell high. Yet everything inside you tells you to do the opposite-to buy the things that are doing good and dump the losers.
So, let me give you an example of how this translates to real money lost! Let’s say that you invested $10,000 each year for 30 years. That amount of money would grow to $1,200,000 at 8% interest. At 5% interest, that same amount of money grows to only $697,000. That means that your emotions, in this example, could cost you as much as $500,000!
That’s a huge sum of money for the same amount of money invested.
I would challenge you to ask if you’ve ever made a stupid decision based on emotion.
Here are a couple of examples:
- Called your investment broker to “hurry” and make a change because of what you thought the market was going to do.
- Purchased that IPO because you just knew that company was going to take off and you didn’t want to miss out. Or, even worse;
- You bought that one stock because you really like their products (think Apple)
- Moved all or a large portion of your money to cash AFTER a market crash
- Moved all or a large portion of you money to equities AFTER a market gain
So, let’s play a little game here. I like to call it, Name That Emotion. What I’d like you to do is to name what emotion people who make the following statements are feeling. Keep in mind that these statements sound very rational at the time but I’m here to tell you that they are not; they’re emotional. Here we go:
- I’m not sure if I should have put my money in that fund. It has already lost 15%. Maybe I’ll sell some of it tomorrow. (Regret)
- I wish I would have known that stock was going to go up. I would have bought more shares. (Greed)
- What if the market drops tomorrow and I lose it all? (Fear)
Now, all this leads me into prediction number 4. I think that we all know that sometimes our emotions get in the way of our investment success. But that doesn’t explain the entire problem. Yes, we can be our own worst enemy. You know it. I know it. And there are other people that know it. Do you know who that is? If you guessed the media and the financial community, would be right.
And that is prediction number four!
(4) The Media Will Continue to Prey on Your Emotions
The fact of that matter is that every news media, news channel, newspaper, magazine, show, and even many websites understand more about psychology and the way we, as humans behave than most therapists. Why, why study this information as a media outlet?
Frankly, it’s because their income depends upon getting your worked up and giving them your attention for a brief moment in your day.
Can you honestly say that if the shows we watch and the information we listened to didn’t entertain and engage us, you would tune in? I know that I probably wouldn’t.
One example that comes to mind for me is that my wife and I watch the show Revenge. If you’ve seen it, than you know it’s about a girl who lost her father because a family, the Graysons, set him up to take a fall for blowing up an airplane in a terrorist plot.
We’re into Season 3 now and I’m not sure what else can go on. It’s over the top! Murder, sex, blackmail, extortion, bribery. You name it, the show has it. But guess what, we tune in each and every episode to see what’s going to happen next.
Believe it or not, the financial media is no different. It’s the reason why Jim Cramer (Mad Money) even has a show in the first place.
Now, not all media is horrible and I believe that there is some very good information out there. In fact, I have a lot of personal financial bloggers and podcasters as friends who I believe are truly out there to educate and inform. But sadly, it’s just not the case all too often.
I’ll prove my point from this morning’s Yahoo Finance page. Here is just a sample of the headlines on the front page:
- Buffet Admits This Is A “Real Threat”
- Chinese Stocks Plummet 8% As Regulators Prick Stock Bubble
- Caesars Bankruptcy Reorganization Dealt Setback by Federal Judge
- Fallout From Saudi Arabia’s Crude Oil Price War
- Alert: 10 Stocks Flashing Buy Right Now
- Oil to Collapse Below $40
- AirAsia Crash Highlights Perils of Region’s Crowded Skies
- Oil at $30; Bonds to go Crazy
- Winners and Losers in the Swiss National Bank Fallout
- Tony Robbins Tells You How to Make Money Like a Billionaire
- Obama to Propose Tax Hikes on Investments
I could keep going all day long and this is just on the first page and only one day. And, just listen to all of those verbs and adjectives. You think that they’re designed to get you worked up? I think so!
Now I can hear people already. “Ryan, are you really telling me that listening to the news and being informed is bad?” No, of course not! Being informed is great but when you start making decisions based on this information that is not in your best interest, it becomes a problem.
Typically, this is where people tell me that, “I’m smart! I know how to be a good investor. I’m not going to make rash decisions based on what a headline says.”
Really? Really? Do you know how much money a superbowl commercial costs? $4,000,000 for 30 seconds and $8,000,00 for 60 seconds last year.
Do you really believe that your decisions are not impacted by what type of information that we consume? I’ve often wondered why Doritos, Pepsi, and Toyota would be willing to drop that kind of money for 30 seconds of our attention. The reason is because they know that if they get in front of us enough and get our attention enough, they can drive us to the action they want.
(5) Investors Will Gamble and Speculate
My last prediction of the stock market and investors for 2015 is that investors will continue to gamble and speculate with their money. And, because of it, they’ll continue to get lower than expected returns and they’ll continue to take on too much risk
Let me share with you how you can answer that question. There are three warning signs that you need to be aware of when it comes to gambling and speculating with your money versus prudently investing it. Here they are. Do you engage or have you hired an advisor to engage in the following:
- Track-Record Investing
- Stock Picking or;
- Market Timing
If you engage in any of these, than you are indeed gambling with your money. I suggest if that’s the case that we head down to Vegas and drop some money because at least we’ll be able to enjoy that time.
Let’s break each one of these down a bit further.
Track Record Investing: Picking a stock or fund based on it’s performance last year and expecting it to repeat. Statistically it’s just not going to happen!
In recognition of the Superbowl in a couple of weeks, you might know that Seattle has made it back to the Superbowl after winning last year. But, do you know how many times that has happened? 10! 10 out of 48 years! Twice a team has been to the Superbowl 3 times in a row. It just doesn’t happen that often.
The same is true with investing. Out of tens of thousands of stocks and funds available, it is very rare that you will see a repeat performance.
Stock Picking: Selecting a stock or fund based on what you think it’s going to do in the future. Here’s the deal with this one. It’s hard not to think that a certain stock is going to perform well while another will perform poorly but no one has a crystal ball-on one! Not even me!
I don’t know what the market is going to do next week let alone next year or the next 10 years.
The price of a stock at any given point in time is the right price. It’s efficient! There are roughly 7 billion people on the planet and there isn’t any one person who knows how they are going to behave. The only way to get a discount on a stock is that if you have some sort of inside information that the public doesn’t know (and by the way, that’s illegal).
By the way, if you think that the stock tip your brother-in-law gave you is legit because his brother-in-law’s uncles, friend works for that company, please do not make a decision based on that. If he knows it, 99% of the time the world knows it and you aren’t getting some special deal on the stock.
Market Timing: Pulling money out and putting money into the market based on what you think that it will do. This brings me back to 2008. I still have discussions about it today. Most people say, “I knew the market was going to crash, I knew it.” Really, if you knew it, why didn’t you pull your money out?
We just don’t know what the market is going to do at any given time. We don’t know when is the peak and we don’t know when is the bottom. All we know is that history shows us that the market tends to go up over time. Latch on to that idea and don’t make rash movements with your portfolio based on what you think (or someone else thinks) the market is going to do. Invest for the long-haul.
So, what’s an investor to do in 2015. Let’s recap my 5 predictions and then we’ll get onto the solution. Here are my predictions:
- The Market Will Go Up and Down
- Some Asset Categories Will Perform Better Than Others
- Investors Will Become Fearful/Investors Will Get Greedy
- The Media Will Continue to Prey on Your Emotions
- Investors Will Gamble and Speculate
So now that you have my predictions, let me share with you 5 very simple strategies that you can use to overcome some of what is against you. Don’t think for a moment that because these are simple, that they are ineffective. In fact, I believe that simple is often best. Leonardi Da Vinci is quoted as saying, “Simplicity is the ultimate sophistication.”
1. Use an investment strategy is broadly diversified: Own as many stocks and funds as you can across all types of sectors and asset categories
2. Re-balance your portfolio regularly: As hard as it may be, sell off stocks that have performed well and purchase stocks that have performed poorly. Do it on a systematic basis (quarterly for example) rather than when you think or feel is right.
3. Tune out of mainstream media and entertainment for financial advice: Understand that much of the financial industry does not have your best interest at hear. They’re out there to make money and that often conflicts with the financial decisions you should be making.
4. Stay the course: Do not make quick, emotion-based decisions. Think about how you are going to behave when the market is up and how you are going to behave when the market is down before it actually happens. You’ll be much better equipped to handle the volatility.
5. Seek Help: If you feel like you want some additional help to overcome these predictions, turn to a financial advisor. You may already be working with one but if not, feel free to reach out to me at www.cittica.com and I will be able to make myself available to you.