Did Anyone Get The License Plate Of That Market?
By Roger Nusbaum, AdvisorShares ETF Strategist
Markets opened the New Year by promptly spending most of the first session down more than 2% before closing on Monday with a decline of 1.5%. The decline was at least partially attributed to a 6.8% drop in Chinese market but whatever the reason, the trading brought out all sorts of attempts to divine what Monday would mean for the rest of January and by extension the rest of 2016.
It boiled down to the January effect whereby the first five days of January “determines” the rest of the month and then the rest of the month “determines” the rest of the year. On the flip side, the extreme open led to several outlets digging up the fact that other than 2008, big declines on the first day of the year have typically been followed by large gains in January and so if January is positive then the January effect would have you believe the rest of the year would be positive.
To which I would add except for the times it doesn’t, which is to say that predictions are really guesses and like anything else, simply extrapolating the past cannot be correct 100% of the time.
So if past is prologue works, except when it doesn’t, then the focus needs to be more about the process and the person overseeing that process and this applies to individual investors managing their own portfolios.
How do you choose the right process? With a nod to the last couple of posts, a strategy that minimizes the chances of doing something self-destructive is probably a good place to start. It can’t be said often enough that whatever the market does over a long period of time, provided there are suitable decisions made regarding asset allocation, can get the job done. The most common self-destructives behaviors are getting fearful when things get hot under the collar leading to selling out after a large decline only to watch the market recover and another is getting too greedy and putting too much into a lottery ticket biotech or too much into the wrong market niche like MLPs in 2015. There are countless other self-destructive behaviors of course including trading too much like reacting to news that places the short term over the true long term objective.
No one knows what the market will do in 2016 but you can’t go wrong remaining disciplined to the strategy you thought was a good idea when the market and emotions were both a little less volatile. Discipline, proper asset allocation and a focus on the true long term objective is a great formula for investment plan success.