Why does it seem like the investment markets rarely do what you want or expect them to do? It’s like walking a dog. Imagine someone walking a straight line down the sidewalk and hoping the dog will follow the same path, but he just appears to be randomly going this way or that. The dog walker represents investors defining a path based on their interpretation of the news and information they receive, often expressed as negative or positive sentiment. The dog represents the securities market and its individual components (stocks and bonds). Sometimes it follows your thinking, but it often doesn’t.
Imagine an investment strategy where investors are rewarded with money when they are able to predict when the dog will walk away from the dog walker, and how far the dog will go, and when the dog will come back. No leash. This is pretty much what market-timing investors are up against when they follow their sentiments as to the direction of the economy—even when they classify themselves as informed investors with some particular skill set. Indeed, sometimes they’ll get lucky, but in the long run, it’s a tough road to follow, with potentially significant negative results in investment performance.
Investors who decide to make their timing decisions based on sentiment will be betting against a collective juggernaut of information baked into the price of their investment based on buyers and sellers around the globe making about 100 million trades per day (2015 source: World Federation of Exchanges) representing about $462 billion in daily average trading. If you know someone who can consistently outsmart this knowledge over decades, hire that person. Then again, you can never know in advance who these folks might be—if they even exist—as it takes a lot of time to separate luck from skill, so even a track record of some significance can fall off the tracks at any given moment.
In U.S. dollars. Source: 2018 data using data from Bloomberg LP. Includes primary and secondary exchange trading volume globally for equities. ETFs and funds are excluded.
All this can be frustrating and leads to two general scenarios:
- Investments (and life) end up being better than we thought for a given time frame.
- Investments (and life) end up being worse than we thought for a given time frame.
Why is this? It’s because of something called cognitive bias, which can be defined as “…a systematic error in thinking that occurs when people are processing and interpreting information in the world around them and affects the decisions and judgments that they make.” Here’s a great article on cognitive bias if you’d like to read further.
I think the essential phrase of the definition is “error in thinking.” Cognitive bias is a fascinating aspect of decision-making and can result in people making any number of errors in judgment. For example, a classic example of cognitive bias is only paying attention to news stories that confirm your opinions.
I bring up all this in the hope of heightening your awareness of this phenomenon. In recent months, I think we’ve all been challenged by our cognitive biases, with an emphasis on negative emotions that may very well disassociate our perceptions of where things will end up with respect to where they actually will end up. Specifically with investing, I’m sure there are many people so steeped in fear that they’re making decisions on how the markets will react based on sentiments most likely skewed by their own cognitive biases—for example, going to cash and/or waiting until things feel like they’ve gotten better.
When it comes to investing (and life), it really takes guidance and discipline to temper our biases to help us achieve a higher probability of success in the long run. Walking the dog is just not as easy as everyone thinks and when it comes to wealth and investing, having a financial advisor by your side could mean the difference between success and failure.
As Mick Jagger so eloquently sang a long time ago in “Walking The Dog”: “If you don’t know how to do it, I’ll show you how to walk the dog.”
Indexes Through June 2020
Table disclosures and (http://worthpointeinvest.com/disclaimer/) performance for periods greater than one year are annualized. Selection of funds, indices and time periods presented are chosen by the client’s advisor. Indices are unmanaged, are not available for direct investment, and performance does not reflect expenses of an actual portfolio. Past performance is not a guarantee of future results. Russell data copyright © Published and maintained by FTSE Russell, a subsidiary of the London Stock Exchange Group,, all rights reserved.www.ftse.com The S&P data are provided by Standard & Poor’s Index Services Group. www.spdji.com MSCI data copyright © MSCI 2020, all rights reserved. www.msci.com. Barclays Capital data provided by Barclays Bank PLC. www.bloombergindices.com.
The second quarter of 2020, represented by the 3 Months column in the table above, was nothing less than stellar for the equity indexes. Small companies represented by the Russell 2000 Index performed the best among equities at 25.42%, while Emerging Markets pulled up the rear at a respectable 18.18%. The real estate indexes, though not as robust, performed very well at 11.71% and 11.46% for U.S. and global, respectively.
The bond indexes were subdued in the second quarter, but the year-to-date (YTD) and 1 Year numbers bode well for the indicated indexes, representing flight to safety among other other factors. For example, you can see the BB U.S. Govt Bond index only returned 0.49% for the second quarter, but returned a very healthy 10.34% for 1 Year.
The U.S. Treasury yield curve ended the quarter mildly upwardly sloped, although the short end remained relatively flat. Intermediate interest rates decreased, while short- and long-term interest rates generally increased during the quarter.
Cares Act Update
Please be advised of some recent developments announced by the IRS this year.
Here are some pertinent updates from IRS Notice 2020–51, which:
- Extends the normal 60-day rollover period to permit repayments through August 31 of waived 2020 Required Minimum Distribution (RMD) amounts
- Allows repayments without regard to the one-per-12-month 60-day rollover limitation
- Permits repayment by non-spouse beneficiaries of waived 2020 required distributions; these repayments will not violate the statutory prohibition on non-spouse indirect (60-day) rollovers for beneficiary IRAs
- Includes a 12-item question-and-answer section related to the 2020 RMD waiver
The views expressed represent the opinions of WorthPointe which are subject to change and are not intended as investment advice or a forecast or guarantee of future results. Stated information is provided for informational purposes only. It is derived from proprietary and non-proprietary sources which have not been independently verified for accuracy or completeness. While WorthPointe believes the information to be accurate and reliable, we do not claim or have responsibility for its completeness, accuracy, or reliability. Statements of future expectations, estimates, projections, and other forward-looking statements are based on available information and management’s view as of the time of these statements. Accordingly, such statements are inherently speculative as they are based on assumptions which may involve known and unknown risks and uncertainties. Actual results, performance or events may differ materially from those expressed or implied in such statements. Investing involves risk, including the potential for loss.
Other articles filed under Market Commentary
October 14, 2020 - Our experiences are not only, by definition, our lives; they shape our outlook on our future potential and everything around us. Recent negative experiences can hold us back from achieving those things we want to accomplish in life—sometimes temporarily, or...
July 17, 2020 - Why does it seem like the investment markets rarely do what you want or expect them to do? It’s like walking a dog. Imagine someone walking a straight line down the sidewalk and hoping the dog will follow the same...
April 20, 2020 - “Wow.” When I pause, look out the window, and think about the current state of affairs, that’s the word that most easily slides off the tongue — and I know those of you I’ve spoken with recently share that sentiment....
March 13, 2020 - You've seen the news and we have, too. In fact, we have a careful eye on everything going down - and up. We've been hearing from many of you about your concerns. The market is clearly responding to new information...
February 17, 2020 - The SECURE (Setting Every Community Up for Retirement Enhancement) Act became law during the last few weeks of 2019 and became effective on January 1. This measure, which affects anyone who has an IRA, includes the following significant changes: RMDs...
- The Morgan Report 2019 Q4 Decade Review: Ch Ch Changes
- Get To Know Rick Wilkinson Better