Chris Ryan: The future ain’t what it used to be
The legendary baseball coach, Yogi Berra, once said “The future ain’t what it used to be.” That sentiment is certainly shared by investors today with headlines of Middle East protests and revolutions, Japanese earthquakes and tsunamis, and continued economic recovery questions. But the truth is that the future has always been uncertain and always will be. Sentiment about the future oscillates between optimism and concern and investors, as a group, are not immune. This oscillation is what makes investment prices swing from over-valued to under-valued over and over again. Last month investors as a group were optimistic and global equity markets were in rally mode. This month, protests and tsunamis have investors concerned and so stock prices have pulled back. Will markets continue to adjust downward, or will they rebound? Every investor wants to know. And every self-proclaimed pundit is eager to share their answer as if they could know. The truth is the future is always unknowable, to predict is interesting but futile, and investors that get this will do better. There is a better way, and we call it Active Indexing. First, consider the case for indexing. There are more than 9,000 companies listed in the U.S. and approximately the same number outside the U.S. The MSCI Global Index includes nearly all of these on a market capitalization basis. According to this index, the U.S. comprises 42 percent of the world index, Europe is 28 percent, Japan is 9 percent, Emerging Markets are 12 percent, and so on. The typical investor tries to allocate their portfolio to various markets – a little in bonds, a little in U.S. stocks, a little in international stocks and so on. Maybe they’ll try themselves to pick individual stocks in each category but, more likely, they’ll choose a money manager or mutual fund that will do it for them. And how likely do you think it is that the manager or mutual fund will pick the right handful of stocks that will beat their respective index? Not very. S&P publishes a monthly report called the SPIVA report, or S&P Index versus Active report, and they consistently show that about 75 percent of managers can’t beat their respective index in any given year. Many sophisticated and large institutional investors have finally figured this out and many have converted to buying index funds. We certainly recommend you consider it, too. To improve upon passive indexing, there is one more step you could consider. We already made the claim that predicting the future is futile. And guessing the direction of global stock markets doesn’t work. But … you can observe the current trend of a given market, or index fund, and invest accordingly. This is the “active” we’re advocating in Active Indexing. The attached chart of the S&P500 includes a 200-day simple moving average. You can clearly see the many up and down-trends over the past 20 years. Any investor using this simple tool could see that there have been times to be fully invested and times to take some money off the table to avoid some losses. We use a similar but more precise set of tools to measure the trends but the concept is the same. The future ain’t what it used to be, it’s true, but the smart investor knows they don’t need to predict the future anyway. Determine the right allocation for your values and needs, build your portfolio with low cost index funds, and if you’re up to it, actively over and under-weight your holdings based on the current trends. Don’t guess, don’t listen to pundits, and stay disciplined. The future will take care of itself.
Ryan Investment Management (RIM) is an SEC-registered investment advisory firm based in Aspen, serving individual investors and non-profits. RIM manages portfolios using an Active Indexing strategy, combining low-cost index funds and ETFs with a disciplined trend-following approach, to provide investors the growth they desire and the protection they need. More information is available at http://www.ryaninvest.com or (970) 429-1100.
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