Investors are 100 days away from a key moment. This is what it is.


What is the sound of 3 years back to 0%?

I saw a pop-up ad this week, and it said something like, “guess which stock has increased 350% this year?” I laughed and thought, in the perception of some investors, maybe all.

My point: there are too many people walking around with a distorted perspective on the type of market climate we find ourselves in. If your risk tolerance level has allowed you to invest heavily in a combination of tech stocks, S&P 500 Index funds and a popular “story” stocks with no profits but lots of speculators, you’ve had a great run these days. last years.

3 years, no returns … no problem?

The 3 year old scorer shouldn’t really be a big deal. After all, any 3 year return is just a snapshot in time. Especially in the middle of the 2020 stock market, you can slide the 3-year timeframe either way, and you might get a whole different perspective on investment performance.

But the 3-year numbers ARE a big deal. This is a key period of commercialization in the investment industry. The 5-year and 10-year returns are also. however, 3 years, for some, is enough time to look at an investment they’ve made and say, “OK, not just a fluke, it’s a failure.” And, like on the Shark Tank TV show, they’re more likely to follow up with, “for that reason I’m missing.”

This time when diversification lost

However, if you focus on “diversification” in the traditional sense, you haven’t had much to show for 2018, 2019 and 2020. As this chart shows, since late January 2018, styles following investments have produced little or positive returns, including dividends:

  • US Small Cap Equity
  • US Mid-Cap Equity
  • US Large Cap Value Equities
  • Inventories of internationally developed markets
  • Emerging market equities

In other words, if you diversify, as many do, based on the classic Morningstar style box, you have a bit of red and gray in most boxes. So-called “growth” stocks performed well, although even these styles were dominated by a relatively small number of companies. As for the rest of the global stock market: not so much.

Growth actions: has the prologue passed?

This may or may not be news to you. I’ve written about this several times, starting by calling the market climate “Stormy” in January 2018. Since then, the S&P 500 has suffered a few 15-20% drops and a 33% crash, but it is. always comfortably ahead of these styles. It has increased by about 28% during this period.

What is the point of telling you and showing you all this data? It is not so much what has already happened. It is that an important marking period is approaching. And that could influence the reaction of investors, media and 401 (k) participants.

You see, we are roughly 100 days past the full 3 year anniversary of the start of the period shown in this graph (January 26, 2018). This means that if the markets are stable or down between now and the end of January, there will be a lot of investment funds and portfolios that will show 3 year returns of 0%, or negative returns.

What to do about it?

I think serious investors should think about how they can take advantage of this situation. First, at least on a relative basis, these other styles of stocks may offer some long-term appeal. Of course, we could have said that a few years ago. The underperformance of everything in growth stocks is not just a problem at 3 years. This has been happening for a while.

However, I think this tells us that traditional diversification methods leave much to be desired. After all, markets work differently now. It is probably late in the growth stocks super-cycle. But that’s not the same as saying that value stocks, smaller stocks, and non-US stocks will just make up for lost time.

I see this environment as an environment where preservation of capital is first, and tactical portfolio management is second. Simply put, now is the right time to look for opportunities in narrower segments of the stock market.

Rotation between sectors and industries offered decent earning potential over shorter time periods. Think weeks and months, not years. I think that will continue to be the case.

If you build it …

And, if you can develop a consistent process for identifying them, praising them, and not extending your welcome, you have a tactical weapon to deploy in a wide variety of market climates.

It’s been a crazy 3 years, minus about 100 days, for investors. And in many corners of the global stock market it hasn’t paid off. And they call it a bull market, don’t they?

Go beyond the headlines and focus on your own priorities as an investor. I think that’s a better approach than finding out, to your surprise, that your financial advisor hung a “goose egg” on your portfolio dashboard for 3 years.

Comments provided are provided for informational purposes only, and not individual investment advice or recommendations. Rob Isbitts provides advisory services through Dynamic Wealth Advisors



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