As we wrap-up 2019, we are in the midst of the banal Wall Street stock market prediction season. Each year, supposed experts, from the major Wall Street firms make predictions about the S&P 500 (US large stocks) return next year. They fill pages and pages describing in minute detail how their predictions are better than the next firm’s strategist. Unfortunately, all this effort leads to predictions that are no better than the proverbial monkey throwing darts. We did a Google search for some predictions made in late 2007 for the coming year. Keep in mind US Large stocks lost 37% in 2008. Bank of America Securities’ Tom McManus said, “The first half is going to be more problematic. I think it’ll be a zigzag year. I think there’ll be a good opportunity to buy stocks in early 2008.” Mr. McManus was off by a bit. In fact, the consensus return from strategists for 2008 was a gain of 16%. They were only wrong by 53%. What is the point of this effort if they can not identify the worst bear market we have seen in most of our lifetimes? There is not much of a point. Our advice: ignore these useless predictions.
We do think there is value in setting resolutions/goals for the new year. So, in that vein, we wanted to share some of our resolutions/goals for the coming year as related to investing your money.
- Despite continued under performance of just about everything except US Large stocks, we will remain diversified recognizing that under performing strategies will outperform in the future and outperforming strategies will under perform. Diversification means owning the stuff that does poorly along with the stuff that does well, and short-term performance issues should not be the basis for abandoning a solid strategy.
- In a low return environment, we will continue to seek out strategies that can increase returns with a prudent amount of risk including alternatives like managed futures, alternative lending and reinsurance. As above, short-term performance issues will not lead us to shift away from the strategies.
- We will continue to recognize that a few poorly timed investment decisions (especially selling at the bottom) can jeopardize a client’s ability to meet their long-term goals. To help protect against these mistimed decisions we are willing to give up some upside to protect on the downside.
- We will continue to recognize that forecasting is very difficult especially in the short term. And therefore, we recognize that an investment strategy based on short term forecasts is unlikely to be successful consistently. On the other hand, long term predictions based on market valuations have shown themselves to help in designing and building portfolios. Even with that said we accept and understand the implications of being wrong.
- And, of course, we could not have a list of new year’s resolutions without a commitment to lose weight, exercise more, get enough sleep and try to relax more!
Over the past couple of weeks and in the first two weeks of January we have and will be placing the following trades:
- Selling all AQR Large Cap Relaxed Constraint (“QLRIX”). AQR decided to liquidate the fund based on a lack of asset growth. AQR blamed multiple factors on the sub-par asset growth including poor performance, a somewhat opaque strategy and, interestingly, an unwieldy name. The fund has a definite value focus, which, as we have mentioned previously, has been out of favor for several years. A value strategy focuses on buying cheaper, unloved stocks and selling high-flying, darling stocks. Although we preferred the fund’s strategy to other AQR offerings, the shift to another fund will not have a significant impact on the portfolio.
- Purchase of AQR Large Cap Multi-Style Fund (“QCELX”). We are buying the fund to replace QLRIX mentioned above. The fund uses the value, momentum and quality factors to identify attractive stocks. AQR’s research on factor investing is second to none and we believe the fund will be able to add value by effectively capturing the premiums associated with the fund’s factors. The fund’s expense ratio is also reasonable at 0.44% vs the category average of 0.95%.
- Purchase of Ishares Edge MSCI USA Value (“VLUE”). The fund focuses on the value factor. The recent under performance of value has created a buying opportunity. The fund’s expense ratio is very low at 0.15%.
- Sell of a portion of our Schwab 1000 Index (“SNXFX”) position to fund the purchase of VLUE above.
- Re-balancing of the portfolio after a strong year in the stock market that has left most portfolios overweight in stocks. Proceeds will primarily go into bonds. Re-balancing is essentially “selling high” and “buying low” which is key to successful long term investing and is necessary when asset class performance diverges.
The trades will take place in several steps as we are trying to avoid buying funds that will make distributions this year and to push any capital gains realization on sells into next year.