…or is it?
On our podcast, we’ve been talking about whether the stock market can continue this extended bull run for at least the last two years. There are signs that things are changing. The Fed removed the word “patient” from their analysis of interest rates, opening the door for a rate increase. Active fund managers have begun beating the index because instead of broad gains, some issues and sectors are widely outperforming others.
How much more room does the stock market have to run?
You know it’s a fool’s game to play the “perfect time to jump out” game, but I recently have watched investors moving toward active fund managers again, hoping to score some short term better returns. This doesn’t make sense. While I agree with analysts that active pickers will continue to “win” against indexes over the short run, your stock market goals aren’t about the short run, are they? The stock picker has a bigger dilemma. It isn’t whether to change strategies now. Maybe you can get lucky and switch to the correct active strategy today…..but knowing that indexing beats most managers over protracted periods, your ability to find the exact time to switch back to a more passive strategy is the problem.
You’ll have to make not one perfect call but two. You might get lucky once, but twice? I serious doubt it.
In investing, then, it becomes a game of deciding whether to stick it out with indexing, knowing that you’re going to probably take a pounding some time in the next few years, or to find other strategies that you’ll nurture and continue to use long term. Some thoughts:
– Friends of mine like Greg McFarlane and Andrew Sather have developed strategies to find quality companies they believe in. Both focus on data and avoid the urge to fall in love with their positions. If you can stomach the risk of individual stocks and also have the guts to use math as your weapon instead of taking the “my brother in law likes this stock so I do too” approach, you could lower your risk this way by avoiding bad companies. Sure, in broad dips all ships sink, but quality companies dip less and boomerang back faster.
– Andrea Travillian uses options to control her downside. Giving yourself the ability to sell when the market drops is attractive. Although you may have heard that options are volatile, her use of these instruments is exactly the opposite: she uses options to lower the risk in her portfolio.
– Hell, you could quit trading stocks and jump into other markets. You could trade metals if you think the market is going to crater. You can consider going offshore and trading currency. In the end, this option might not avoid risk, but will expose you to different types of investing that could widen your knowledge of investing strategies in the future. You can either trade only stocks, or learn to trade currencies, metals and others. Developing a “Swiss army knife” investing approach will spread your knowledge and help you maneuver in the future.
What’s the Right Answer?
For most of us, because of human nature, sticking with index funds is the winning play. Why? Human nature says we’ll start a new investing strategy only to abandon it midstream. We don’t take the time to stick with it until the finish, especially if we aren’t successful in the first twenty minutes. Much like diet swapping, we’ll keep looking for the next hot investment rather than creating a system of investing that we can use long term. That doesn’t mean that exploring currencies, options, or individual stock picking is a poor choice. It only means that if you’re going to begin exploring other investing strategies, you have to dedicate the time and energy to give yourself a chance to win.
….and that isn’t going to happen overnight.
Photo: Daniel Lobo