THE BLOG

A Surprising Spin on a Bad January

02/18/2014 07:16 pm ET | Updated Apr 20, 2014
  • Dan Solin Author of the Smartest series of books

There was much hand-wringing about the poor stock market returns in January. The financial media engaged in its usual frenzy of speculation about whether these results meant we were in for a "correction" or worse.

Typical of the financial babble about the "significance" of January returns is this silly observation by Matt King, chief investment officer at Bell Investment Advisors: "Frankly, we've been telling clients to expect a 5 percent to 10 percent decline. We didn't think it would happen so early in the year, but it's been such a good run for markets that a meaningful correction is normal and healthy."

Here's the problem with that thought: The number of variables you would have to get right to predict global returns is daunting and illustrative of the problem. Do you really believe Mr. King or your broker can peer into the future and accurately tell you how diverse global markets and asset classes will perform?

Let's take a look at what would be involved in this process. In January, U.S. mid-cap stocks outperformed large-cap and small-cap stocks. Much-maligned REITs were the top-performing sector.

Most investors understand that holding a globally diversified portfolio is prudent. Your broker would need to predict the returns in non-U.S. developed markets as well. In that market, small caps beat the returns of mid-caps and large caps. Value stocks outperformed both neutral and growth stocks. The top-performing sector was health care. The top-performing country in these markets was Denmark, with a weighted-average return of 2.79 percent. The worst performer was Finland, with a weighted-average return of -6.97 percent.

It was a rough month for emerging markets, but you may be surprised to learn that the top-performing country was Egypt, with a positive weighted-average return of 8.90 percent. Apparently, there isn't a negative relationship between political unrest and stellar market returns. Then again, maybe there is, because the market in Turkey posted a whopping loss of -12.82 percent.

The musings of pundits about "normal" or "abnormal" market corrections are typically so nonspecific that they are meaningless and misleading. Instead of relying on the predictive powers of emperors with no clothes, you should focus on the long term.

If you are really concerned about the performance of the global markets in January, you should not have any exposure to stocks.

On your next visit with your broker, when he or she tosses out observations about the future of the markets with great confidence and authority, ask this question: Did you predict the January outperformance of the markets in Denmark and Egypt?

Once you understand that the premise of market-beating investments is flawed, change your investing philosophy. Invest in a globally diversified portfolio of low-management-fee index funds or passively managed funds. Advisers add value by focusing on broad diversification, asset allocation and providing a wide range of wealth management services that include insurance, estate planning and retirement planning. Their investment advice is based on evidence and not on a premise that they have a clear vision of the future.

As my colleague Larry Swedroe is fond of saying: "My crystal ball is always cloudy."

Dan Solin is the director of investor advocacy for the BAM ALLIANCE and a wealth adviser with Buckingham Asset Management. He is a New York Times best-selling author of the Smartest series of books. His next book, The Smartest Sales Book You'll Ever Read, will be published March 3, 2014.

The views of the author are his alone and may not represent the views of his affiliated firms. Any data, information and content on this blog is for information purposes only and should not be construed as an offer of advisory services.