The Big Picture

“The stock market is the story of cycles and of the human behavior that is responsible for overreactions in both directions.” – Seth Klarmen

Overreaction in the markets? Go on…!

I think most investors understand the market is cyclical. Especially those investors who have been through a full cycle! We have an interesting phenomena happening today where there is a growing population of investors who have not. After the longest bull run ever this isn’t so much of a surprise. I am seeing a growing trend among younger investors whom are making some dangerous assumptions. One example, “Cycles don’t matter!” Easy to say until one is experienced! After the opinion on the subject is very likely to change. What I have found is cycles change an investor’s attitude and behavior towards the markets and investing. In some cases, permanently!

Most investors who have been through at least one cycle can relate to the chart below.

The Cycle of Investor Emotion.

I recently watched a popular “comedic newsman” discuss investing in defined contribution plans (401k’s, etc.). They were primarily focused on the popular messaging that large plan providers discuss in the mainstream media. What caught my attention was a comment in his closing statement:

“As long as you do a few key things you are probably going to be fine.”

The key things? Long and short, it dwindled down to understanding saving earlier is better, use of low cost funds, what fiduciary means, lowering risk as you get older, and of course, fees. All important points, but those are not the only key things I would focus on. Nor, in my opinion, was the most critical key thing even mentioned!

I would like to discuss the “probably”...

Have a Plan and a Process!

From the Trenches

“Assumptions are dangerous things…” – Agatha Christie

There is another quote on assumptions… but this is a PG post! 

Have you ever read the assumptions that are made with traditional investment theories? I discuss this from time to time, and what I find is many investors are not even aware of the assumptions they are blindly accepting and relying upon to secure their financial future.

The “probably”…

Probably is the recognition that there are assumptions made that are not realistic and are out of our control. Quite frankly, some are outright ridiculous and tragically somewhat humorous. These assumptions have delivered a very wide range of results. What is the reality on longer term passive investment results?

The below chart shows rolling 20 year returns going back to 1920. Notice that the most important determinate of success was when savings commenced. There are market cycles that generally last 5-7 years but there are also longer secular cycles as illustrated below.

The primary takeaway on the above chart is when employing a passive strategy the timing of when the investor began saving made all the difference. Which is entirely out of their control! It is simply the luck of reaching material saving years at a favorable time. What was the primary factor determining the favorable time? Valuations. The valuation of the market. In spite of a growing number of investors believing that valuation doesn’t matter. Or, that the market is always appropriately valued. The market tends to give us reminders that it is not. When valuations were favorable at commencement the returns were quite satisfactory. For example, investors who began saving in 1980, when valuations were relatively low, experienced one of the strongest secular bull markets in a century lasting nearly 20 years. Compare to those who began saving in 1960 when valuations were materially higher. A much different outcome.

Where are valuations today?  Hmm… Not a bad question to ponder. Followed by how do we manage the risk if valuations are not favorable? Followed by identifying strategies that may perform well in said valuation environment. Followed by… Starting to put together a process here!

Bottom Line: The assumptions investors make regarding their savings plans are a critical determinant of success. Another critical determinate is assessing the market environment characteristics in front of you!

The Weeds

Time and again, in every market cycle I have witnessed, the extremes of emotion always appear, even among experienced investors.” – Michael Steinhardt

See the chart in the first section! I read a book some years back about a prominent investment strategy. An investment manager discussed, still in the game today, used to break his keyboards because the market wasn’t doing what he wanted it too! Interesting approach, not very effective, but likely created some very short term satisfaction for him.

Stick to process…

When the reality behind the math of investing is studied, it becomes very clear that cycles matter. Not only the shorter term market cycles but also longer, secular cycles. Secular cycles are important for the simple reality that they can define a generation’s opinion on investing in the financial markets. And I can assure you they do! One generation’s experience is vastly different from another’s.

Below chart is the inflation adjusted S&P 500 Index showing clear secular bull markets as well as bear markets. The secular bears generally coincide with unfavorable initial valuations.

Looking at the above chart, the reality may be a little disheartening. Especially for the passive investor! The difference between beginning at a secular trough versus a secular peak are black and white.

If you are going to be passive, then also be lucky!


Critical Point

Having a process for navigating the market cycle is not only important, it can make or break your financial future. Understanding the assumptions made in investment planning are a bare minimum essential before embarking on your investment plan. Furthermore, understanding whether the strategy employed will have a favorable probability of success in a given market environment is an important conversation to have!


*Posts are written covering three primary topics: Macro, or the big picture; Investment Planning considerations; And the Markets – What is going on there?

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The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

Past performance is no guarantee of future results. All investments involve risk and may lose value. There is no assurance that the objectives of any strategy will be achieved. No strategy can guarantee a profit or fully eliminate the risk of loss.

The S&P 500 is an unmanaged index which cannot be invested into directly. This index is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. 

Investment advice offered through IFP Advisors, LLC, dba Independent Financial Partners (IFP), a Registered Investment Adviser.