Avoid ‘easy trade’ mentality
By Laif Meidell, CMT, president of American Wealth Management, and portfolio manager of the AdvisorShares Meidell Tactical Advantage ETF (MATH)
Something I’ve noticed after observing investor behavior for many years is our human nature to look at the world around us and project our current reality indefinitely into the future.
I’ve had investors tell me after experiencing a decline in their portfolio over one month, how at the current rate of decline, their diversified portfolio will be worth nothing so many months out into the future.
This portion of our psyche is a survival mechanism that served our ancestors well. For example, it motivated our ancestors to migrate from an area when food or water became less abundant, and relocate to regions where food or water was more plentiful. They understood that if they waited for the figurative “well to run dry” before leaving, it could turn into a matter of life and death. The problem with this survival mechanism is, it doesn’t serve us quite so well when it comes to forecasting investments performance into the future.
Just a year ago, the financial media was brimming with opinions of where to invest in 2014. Most took their cue from their recent experience in 2013, where the Standard & Poor’s 500 had risen over 30 percent and the Barclays U.S. 20+ Year Treasury Bond index had declined over 12 percent for the year. The general consensus in the media was, reduce or eliminate your allocation to bonds and put your money in stocks. To be fair, some suggested buying dividend-producing stocks which, with the exception of energy stocks, generally performed well in 2014.
Doing what has worked in the immediate past is what I call the “easy trade,” and from my experience, life and investing is rarely that easy. As it turned out, the S&P continued higher in 2014, gaining 11.4 percent, though most other areas of the stock market underperformed. But the Barclays U.S. 20+ Year Treasury Bond index gained roughly 25 percent for the year. The lesson is, be cautious of the general consensus; by the time everyone is in agreement, the show is nearly over.
Currently, the “easy trade” is for further strength in the U.S. dollar in 2015. This implies that the U.S. is the only place to be invested, and that commodities and foreign investments will continue to underperform in 2015, as they did last year. That would be too easy.
This commentary originally published in the Reno Gazette-Journal. Performance numbers used in this article were obtained through eSignal and are not guaranteed to be accurate.