Closing The Books On 2015
By Roger Nusbaum, AdvisorShares ETF Strategist
The transition from the old year into the new is always busy for tax reasons, reviewing the old year and game planning for the future.
So 2015, how’d you do? Did you beat the market? Those are common questions for this time of year and while those may seem to be important they are less important than the humbler “did you screw anything up beyond repair?” An advisor, among other things needs to prevent clients from doing themselves in out of emotion or any other unintentionally self-destructive behavior. An individual investor needs to manage this for themselves, which is doable with a whole lot of self-awareness.
The reason not screwing up is arguably more important than anything else is that the stock market averages 7-8% annualized over long periods of time but year to year it is a guess as to what the market will do. Seven or 8% can be a sufficient growth rate over long periods of time and of course 7-8% includes all the great years and the terrible years. If nothing else, if an investor doesn’t panic and just holds on to capture most of that 7-8% then they have a good chance of having enough money when they need it. This is essentially the argument for the stock market being less risky over longer periods versus shorter periods which then places more importance on savings rate and lifestyle than market performance…unless there is a major screw up.
In 2015 a major screw up could have come from chasing yield with too much exposure to MLPs. The space has obviously been decimated in 2015. Someone who had 3-5% in MLPs all the way down had a meaningful portfolio drag but with a properly diversified portfolio could easily be pretty close to the market and pretty close can get the job done. The person who heeded one of the countless articles from a couple of years ago suggesting 15-25% in MLPs has a much bigger problem.
In most years there are market niches that blow up, this year it was MLPs and in the future there will be others. From the advisor’s perspective explaining why there was an MLP in the portfolio is infinitely easier than explaining why 20% was in MLPs. From the perspective of the individual investor it becomes an inconvenience as opposed to a now what do I do situation.
The idea of not screwing up might seem boring and like a low bar but for most investors boring is exactly what they want even if they don’t realize it and what good is beating the market (huge assumption there by the way) with an inadequate savings rate? Relying on the market to bail out an investment plan is to rely on what is out of the investor’s control and that is a bad bet.