This is the season to impress. Money managers will try to sound smart by predicting what the year ahead has in store for investors. Inevitably they will get some things right and some things wrong – a fact that underlies the need for daily diligence. Indeed, successful money managers are often only modestly more right than wrong over time. The difference is that they have a disciplined process designed to minimize the frequency and magnitude of losses.
Why is this so important to understand? Because we are entering a year when most expect a bumpy ride that will require more risk management than usual (Ken Solow gives us an insight into Pinnacle’s investment analysts research habits here). While the economy is slowly improving, the Federal Reserve appears committed to withdrawing the artificial price support of quantitative easing. Most forecasts were calling for a 10% correction sometime this year. I don’t think they expected to finish January – the historically strongest month of the year – down 3%.
So is the cyclical bull market over? Or is this the pause that refreshes? These are important questions that we will only know the answer to at the end of the year. What we do know is that in late 2012 and 2013, we saw many advisors who were questioning passive strategies after big losses in 2008/2009 renew their faith as markets approached and exceeded the 2008 highs. We also heard increased chatter about clients pressuring advisors to finally capitulate and participate in the cyclical bull. This optimism can be seen in investor sentiment at extreme highs. Moreover, we know that the cyclical bull market is mature, technical divergences are emerging (for Sean Dillon’s recent analysis of market health, click here) and valuations are now modestly expensive. The easy money is behind us.
At Pinnacle we acknowledge these are not easy questions. In order to protect our clients and preserve the assets that drive our revenues, we have invested more than a $1 million per annum on a six-person team, leading edge technology and institutional quality independent research to ensure that we have the resources to weigh the evidence and make modestly more good decisions than bad. And to their credit, they have. We now boast a ten-year GIPS audited track record of beating the benchmarks with less risk. Even so, the future always looks uncertain.
What will you do? How will you answer these questions in 2014? Are you confident in your process? Do you have the time and the resources to do the job well? If you don’t like the answers, fasten your seat belt … or give us a call.