(Another great market comment from Flexible Plan's Jerry Wagner)
When I sat down to write this article, my wife was beginning to take down the Christmas decorations. She loves Christmas and tries to make our home as festive as possible for the holidays. When they all come down in January, it is a bit depressing.
I’m not alone. Each year when my dad would come home from work on the day my mother took down the Christmas lights, he would always put on a gloomy face and blurt out how drab everything now looked. Since my mom always prided herself on keeping a cheery house, I’m sure that wasn’t the best way to put it, but I think she understood.
Everything seems brighter during the holidays. People seem a little bit more upbeat, and many of us are fortunate to see friends and family that we don’t get to see during the rest of the year. It’s a good time, so the change is noticeable when the holidays draw to a close.
Amazingly, even the stock market seems to follow this same psychology. Over the holidays the stock market usually rises. In fact, while the Christmas season is the best of times, the periods preceding all the other national holidays show marked tendencies for the stock market to rally.
Of course, the markets as a whole always seem to be going through a cycle of holiday-like exuberance, followed by a post-celebration hangover. This constant cycling, whether following the business, election, quarterly earnings, or even the day-of-the-week cycle, is a real phenomenon that has always been a part of investing.
Buy-and-hold investing has simply ignored this natural order of things. It is based on the premise that these cycles seem to occur but that they are not tradable and that the best one can do is ignore them, stay the course, and bet on the fact that the next cycle will take investors to higher heights than the last.
Active investing takes a different view. All of those flights of investor emotions, up and down, whether spinning around the holiday patterns or the different periodic cycles of life, are not to be ignored. Rather, they are opportunities.
They are a chance to benefit from the rallies and avoid some of the losses of the declines. Active investing can use the bumps in the road to turn even a declining road upward. And if our road simply continues moving higher, it can take us to heights never before attained.
However, because active management strategies react to many different ripples in the fabric of the financial markets, a strategically diversified portfolio of these types of strategies invested in multiple asset classes may increase the chance for protection. When the markets reach the end of the black ice patch, our goal is to have survived with our assets intact.
Those Christmas decorations we were taking down when I began this article included the Christmas lights. The process we have to go through in improving a strategy reminds me of the agony we all go through when a string of lights isn’t working.
Because most Christmas lights are wired serially, when one goes out, they all go out. The trouble is that since all the lights on the string go out, you don’t know which light is the problem. To find the culprit, you have to replace each light in turn. It’s no wonder so many strings of lights are tossed when they stop working!
Since all of our strategies were designed to fill a portfolio niche and already have consumed a great deal of energy in bringing them to the market, throwing the strategy away is not the first option. Rather, we invest the time, painstakingly working our way through the strings of data to find the wrongdoer and fix it.
Of course, it is not always as obvious that a strategy needs fixing as it is that a string of Christmas lights is not working. In the latter case, one minute the colorful lights are twinkling and the next … it’s dark.
With strategies, they can still be working, but the market can be in an environment that does not let them shine. Hence the need for both strategic diversification for those out-of-sync time frames and the OnTarget Investing process to identify those that may be “broken.” Fortunately, both are fixtures, rather than just colorful decorations, here at Flexible Plan Investments.
Hope your holiday season was a delight. We will continue to work hard to help make the new year a prosperous one!