A Slight Paradigm Shift

It seems like the theme to this weeks posts have been along the lines of realizing that US equities are still not looking so hot but that there is opportunity in certain foreign markets and themes. This is obviously a long running thread here that I believe is becoming increasingly more important.

On one of the posts there was a comment left that reasonably noted the difficulty in beating the market further noting that most people don’t have the time that is probably needed for what I’m talking about.

As far as the time needed that is no doubt an issue for many people especially 401k participants. However if you take the time to read stock market blogs then chances are you have more time available than most other people either as a function of circumstance, interest or both. While this assures nothing it is a chance.

To the idea of beating the market, this is maybe where the paradigm needs to shift a little. Forgetting about the notion of beating anything the more important goal should be having enough money when you need it. If someone had the foresight in 2000 to realize that the S&P 500 would go down for the decade then one way or another they would have avoided long exposure and maybe even gone short. Armed with that knowledge the simple act of avoidance, maybe staying in the money market would have “beaten the market.” If money market rates averaged 2% for the decade (I don’t know what the average over the ten years was) then yes this hypothetical investor would have beaten the market but the next question is if they were where they needed to be, per their plan, in 2000 are they still where they need to be factoring in savings and the compounding of 2% for ten years.

For the sake of discussion what if this hypothetical investor after trouncing the market by virtue of being in cash for ten years is now way behind where his financial plan calls for him to be in 2010? Outperforming in the manner outlined above is better than equaling or lagging the market in that ten years but does not change the more important fact that this investor is now behind where he needs to be.

Conversely an investor could have lagged the 300% lift that the S&P 500 had in the 1990s and still been ahead of plan. Chances are an investor who averages 200% per decade (an absolutely heroic result) will be miles ahead of their plan when they need the money assuming inflation doesn’t do anything crazy. The point of both examples is that beating the market is not necessarily the important thing, certainly not compared to having enough money when you need it.

Now, looking forward what are the prospects for the S&P 500? If you think they stink what are you going to do? Simple avoidance could work but money targeted for equity exposure probably needs to go somewhere. Just for the sake of discussion let’s say that instead of the US an investor put 25% each into four countries. The countries don’t really matter other than, IMO, avoiding Western Europe and Japan. For diversification sake say that of the four two are commodity based and two are fast ascending in terms of the story on the ground. Countries from these two groups might have different enough attributes that they offer some diversification against each other.

In this hypothetical example where on the priority list is beating the market? If it is on the list at all then what market should this person be trying to beat? Benchmarking against the SPX in this case makes sense in that the four countries are being chosen to add value versus investing at home but benchmarking SPX does not make sense because really the example here is changing markets from the home market.

Total avoidance and doing away with the idea of beating the market would be a paradigm shift of sorts. If you are 50 years old in 2010 and have $375,000 today and you need to have $900,000 in 2020 you are going to try to get there by market appreciation and putting away money every month. If in 2020 you have $1.2 million saved it won’t matter very much whether you beat the market or not because you will be in decent shape relative to your plan (assuming it was well constructed). If in 2020 you have $760,000 it won’t have mattered whether you beat the market because you will be short of what you need and something will have to give somewhere.

2 Comments

  1. Beating the market is VERY VERY important to me. If I beat the market I am adding value to my portfolio.

    If I am not capable of beating or my adviser is not capable of beating the market than I or he are not adding value and should be fired. Then I can go bicycle and read novels or stop paying an adviser to help ruin my portfolio.

    Their is nothing wrong with owning the S&P even if you have 20+ million if owning the S&P does better than you can.

    I do beat the S&P but if we get to a point where I can not add value I will buy a dividend oriented portfolio and fire myself as manager.

    SEG

    Reply
  2. Although I am following the markets as usual, I have been relatively inactive, preferring to play defense and stick with a portfolio overweight in dividend-rich investment grade securities, especially under the call trust preferreds,seasoned with a dose of commodities and funds such as the Permanent Portfolio. Sure, I have other investments that provide diversification, but I am not adding much of anything to that portion of wealth.I believe that at age 59 current uncertainty and angst is not worth me gaming growth or guessing for the winning world market. In short, I am negative on our economic path and the world investment climate – moreso than at anytime in the past.I do not view that as a counter-intuitive “buy” signal. I’ll wait to see how things sort out.

    Income,(legal) tax avoidance, investments that include but are not limited to securities, a comfortable, conservative saving/spending regimen and keeping active and healthy fill the bill for me.

    If one wants some stress relief, I recommend the NFL Network fantasy football league system. It’s great fun to run a few teams, and errrors in picking your portfolio of players is cost free.

    T

    Reply

Submit a Comment

Your email address will not be published.

WP-SpamFree by Pole Position Marketing

A Slight Paradigm Shift

It seems like the theme to this weeks posts have been along the lines of realizing that US equities are still not looking so hot but that there is opportunity in certain foreign markets and themes. This is obviously a long running thread here that I believe is becoming increasingly more important.

On one of the posts there was a comment left that reasonably noted the difficulty in beating the market further noting that most people don’t have the time that is probably needed for what I’m talking about.

As far as the time needed that is no doubt an issue for many people especially 401k participants. However if you take the time to read stock market blogs then chances are you have more time available than most other people either as a function of circumstance, interest or both. While this assures nothing it is a chance.

To the idea of beating the market, this is maybe where the paradigm needs to shift a little. Forgetting about the notion of beating anything the more important goal should be having enough money when you need it. If someone had the foresight in 2000 to realize that the S&P 500 would go down for the decade then one way or another they would have avoided long exposure and maybe even gone short. Armed with that knowledge the simple act of avoidance, maybe staying in the money market would have “beaten the market.” If money market rates averaged 2% for the decade (I don’t know what the average over the ten years was) then yes this hypothetical investor would have beaten the market but the next question is if they were where they needed to be, per their plan, in 2000 are they still where they need to be factoring in savings and the compounding of 2% for ten years.

For the sake of discussion what if this hypothetical investor after trouncing the market by virtue of being in cash for ten years is now way behind where his financial plan calls for him to be in 2010? Outperforming in the manner outlined above is better than equaling or lagging the market in that ten years but does not change the more important fact that this investor is now behind where he needs to be.

Conversely an investor could have lagged the 300% lift that the S&P 500 had in the 1990s and still been ahead of plan. Chances are an investor who averages 200% per decade (an absolutely heroic result) will be miles ahead of their plan when they need the money assuming inflation doesn’t do anything crazy. The point of both examples is that beating the market is not necessarily the important thing, certainly not compared to having enough money when you need it.

Now, looking forward what are the prospects for the S&P 500? If you think they stink what are you going to do? Simple avoidance could work but money targeted for equity exposure probably needs to go somewhere. Just for the sake of discussion let’s say that instead of the US an investor put 25% each into four countries. The countries don’t really matter other than, IMO, avoiding Western Europe and Japan. For diversification sake say that of the four two are commodity based and two are fast ascending in terms of the story on the ground. Countries from these two groups might have different enough attributes that they offer some diversification against each other.

In this hypothetical example where on the priority list is beating the market? If it is on the list at all then what market should this person be trying to beat? Benchmarking against the SPX in this case makes sense in that the four countries are being chosen to add value versus investing at home but benchmarking SPX does not make sense because really the example here is changing markets from the home market.

Total avoidance and doing away with the idea of beating the market would be a paradigm shift of sorts. If you are 50 years old in 2010 and have $375,000 today and you need to have $900,000 in 2020 you are going to try to get there by market appreciation and putting away money every month. If in 2020 you have $1.2 million saved it won’t matter very much whether you beat the market or not because you will be in decent shape relative to your plan (assuming it was well constructed). If in 2020 you have $760,000 it won’t have mattered whether you beat the market because you will be short of what you need and something will have to give somewhere.

Submit a Comment

Your email address will not be published.

WP-SpamFree by Pole Position Marketing