ARBOR WEALTH: First downs, rain dancing and Frank Sinatra
“You’re ridin’ high in April … shot down in May.” — from “That’s Life” as recorded by Frank Sinatra
College football is finally here. I don’t understand the game, but I love the pageantry, the bands and the cool weather that accompanies it.
So let’s apply the gridiron to markets. Corrections historically occur every 18 months or so, and can be compared in football to several plays that lose yardage. Crashes are much more rare. Picture a team bus that can’t find the stadium.
Explaining complicated, gray areas of market movements can sometimes be challenging. Television soundbites are tailored for extreme simplifications, not for occurrences with nuanced and varied concepts.
Recently at a national economic conference our investment team listened to a presentation by a “Permabull." This internationally famous economist contends that markets will always and only uptrend. Later that day we absorbed a lecture by another equally famous financial figure. This gentleman is a “Permabear," or one who thinks that markets are constantly a day away from disaster.
Which economist is correct? Eventually they both will be. It’s just a matter of time before the next bull market and … until the next bear market. When these conditions arrive, the aforementioned pundits will proclaim that the current economic environment is proof of their foresight. But as John Rekenthaler of Morningstar says, “Huddling in a tent for several years straight, then leaping up to exclaim “Aha!” when the thunder finally sounds does not a rain doctor make.”
It’s what happens between rainstorms that matters most. And markets are infinitely more complex than these two economists would have us believe. These pundits stake out positions on the far reaches of the economic spectrum, and make themselves available to supply pithy soundbites whenever markets trend toward their predictions. Their rigid dogma is problematic, though, because changing economic conditions require flexible market interpretive skills. Rebalancing portfolios, metaphorically speaking, means dancing between the raindrops with asset allocations, not hiding in a tent and waiting for economic conditions to justify one’s position.
Some advisors and investors saw the impending crash before the Great Recession and protected assets. Some also saw the end of that crisis and pivoted at the most propitious moment, reallocating assets as the recession lost its momentum. They were bearish, then they went bullish. Astute investors and advisors remain ideologically nimble. They constantly absorb new information, listen to conflicting views, and most of all, stay attuned to economic changes.
These investors and advisors still adhere to and maintain an investment philosophy. Values don’t change over time. What changes is how they apply these values to changing market conditions.
Being a “Permabear” or “Permabull," in the long run, simply isn’t very profitable. And profits are the name of this game.
Margaret R. McDowell, ChFC, AIF, a syndicated economic columnist, is the founder of Arbor Wealth Management, LLC, (850-608-6121 — www.arborwealth.net), a “fee-only” registered investment advisory firm located near Sandestin. This column should not be considered personalized investment advice and provides no assurance that any specific strategy or investment will be suitable or profitable for an investor.