It’s a new high for the Dow Jones Industrial Average, closing Friday at 14,397. The S&P 500, currently at 1,550, is just shy of its high of 1,565 in October of 2007. Friday, the unemployment rate dropped to an unexpected 7.7%. It’s hard to believe that four years ago in March of 2009 (S&P 500 low of 676) we were hearing from clients their concern about another Great Depression, the potential for martial law in the streets, and the end of America as we know it. Thankfully, there were careful, albeit scary and unprecedented, steps taken to slowly and painfully back away from brink of the abyss. Miraculously we moved on from that to these new highs.
Recently the CFA Institute conducted a poll of the readers of their news digest, many of whom are CFA charter holders. They asked what the next major financial-market mover, with effects significant enough to last more than one year, would be. About 27% chose the option “a macroeconomic event” (pretty vague), and another 24% said “a random unforeseeable event.” The remaining chose more concise, specific options having to do with quantitative easing, corporate profits, technology, etc.
What I took from this is that over half of the poll respondents, who are presumably well-informed professionals in the field of investment management, have no clue what will happen next to shake the markets. This may be disconcerting at first glance, but I found it comforting. We often receive pressure to predict the short-term future of the financial markets. But we don’t believe it is possible to do this with any real success.
However, we do believe in the long-term success of a well-diversified portfolio that is suited to the investor’s risk tolerance. We believe that keeping your allocation intact during good and bad times is the best way to avoid the pitfalls of market timing. The crash of 2008-2009 may have been “unforeseeable” but so was the stock market reaching new highs this spring — even just one year ago we thought Greece was going to fall off the map.
Predictions may be interesting, but they shouldn’t be used to decide whether or not to make a short-term investment in an asset class. Maintaining your chosen asset allocation is crucial. Of all of the predictions that I recall from the spring of 2009, I don’t remember anyone suggesting that we’d see new highs on the stock market in four years with unemployment slowly ticking down to 7.7%.
Harli L. Palme, CFA, CFP(r)