The Patience Principle – Surviving Rough Financial Markets

Market TumbleChina Worries Rattle World Stock Markets
The Patience Principle

“Surviving Rough Financial Markets”

Global markets are providing investors a rough ride at the moment, as the focus turns to China’s economic outlook. But while falling markets can be worrisome, maintaining a longer term perspective makes the volatility easier to handle. A typical response to unsettling markets is an emotional one. We quit risky assets when prices are down and wait for more “certainty.”

These timing strategies can take a few forms. One is to use forecasting to get out when the market is judged as “overbought” and then to buy back in when the signals tell you it is “oversold.”

A second strategy might be to undertake a comprehensive macro-economic analysis of the Chinese economy, its monetary policy, global trade and investment linkages, and how the various scenarios around these issues might play out in global markets.

In the first instance, there is very little evidence that these forecast-based timing decisions work with any consistency. And even if people manage to luck their way out of the market at the right time, they still have to decide when to get back in.

In the second instance, you can be the world’s best economist and make an accurate assessment of the growth trajectory of China, together with the policy response. But that still doesn’t mean the markets will react as you assume.

A third way is to reflect on how markets price risk. Over the long term, we know there is a return on capital. But those returns are rarely delivered in an even pattern. There are periods when markets fall precipitously and others when they rise inexorably.

The only way of getting that “average” return is to go with the flow. Think about it this way. A sign at the river’s edge reads: “Average depth: three feet.” Reading the sign, the hiker thinks: “OK, I can wade across.” But he soon discovers the “average” masks a range of everything from 6 inches to 15 feet.

Likewise, financial products are frequently advertised as offering “average” returns of, say, 8%, without the promoters acknowledging in a prominent way that individual year returns can be many multiples of that average in either direction.

Now, there may be nothing wrong with that sort of volatility if the individual can stomach it. But others can feel uncomfortable. And that’s OK too. The important point is being prepared about possible outcomes from your investment choices. Markets rarely move in one direction for long. If they did, there would be little risk in investing. And in the absence of risk, there would be no return. One element of risk, although not the whole story, is the volatility of an investment.

Look at a world stock market benchmark such as the MSCI World Index, in US dollars. In the 45 years from 1970 to 2014, the index has registered annual gains of as high as 41.9% (in 1986) and losses of as much as 40.7% (2008).
But over that full period, the index delivered an annualized rate of return of 8.9%. To earn that return, you had to remain fully invested, taking the unsettling down periods with the heartening up markets, but also rebalancing each year to return your desired asset allocation back to where you want it to be.

Timing your exit and entry successfully is a tough task. Look at 2008, the year of the global financial crisis and the worst single year in our sample. Yet, the MSCI World index in the following year registered one of its best ever gains.
Now, none of this is to imply that the market is due for a rebound anytime soon. It might. It might not. The fact is no one can be sure. But we do know that whenever there is a great deal of uncertainty, there will be a great deal of volatility.

Markets PictureSource: MSCI data © MSCI 2015, all rights reserved. Indices are not available for direct investment; therefore, their performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is not a guarantee of future results.

Second-guessing markets means second-guessing news. What has happened is already priced in. What happens next is what we don’t know, so we diversify and spread our risk to match our own appetite and expectations.

Spreading risk can mean diversifying within equities across different stocks, sectors, industries, and countries. It also means diversifying across asset classes. For instance, while stocks have been performing poorly, often bonds have been doing well.

Markets are constantly adjusting to news. A fall in prices means investors are collectively demanding an additional return for the risk of owning equities. But for individual investors, the price decline, if temporary, may only matter if they need the money today.

If your horizon is five, 10, 15, or 20 years, the uncertainty will soon fade and the markets will worry about something else. Ultimately, what drives your return is how you allocate your capital across different assets, how much you invest over time, and the power of compounding.

But in the short term, the greatest contribution you can make to your long-term wealth is exercising patience. And that’s where Prudent Investor Advisors and its investment professionals can help you.

Past performance is not a guarantee of future results. Diversification does not eliminate the risk of market loss. There is no guarantee investment strategies will be successful. International investing involves special risks such as currency fluctuation and political instability. Investing in emerging markets may accentuate these risks. Fixed income securities are subject to increased loss of principal during periods of rising interest rates. Fixed income investments are subject to various other risks, including changes in credit quality, liquidity, prepayments, and other factors. All expressions of opinion are subject to change. This article is distributed for informational purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, products, or services.

Prudent Investor Advisors, LLC is an investment adviser registered with the Securities and Exchange Commission.

Gary Allen on Business – Sunday, August 2, 2015 – Podcast Now Available

International Turmoil… China Greece

China Greece High Resolution Sign Flags Concept

Trouble Overseas?

Summer financial headlines have been dominated by foreign financial markets. As we enter the month of August, Greece has begun to fade from the headlines while China rises to the top.

Segment one of this program I spend time talking about Greece and its recent financial crisis. Despite the dire headlines, Greece is a very small country measured by its financial markets and its economy.

China is the focus for segments two and three. This country is very large and its economy is one of the largest in the world. What happens in China is meaningful compared to Greece.

However, because of its communist system the Chinese stock market is very small relative to its population and its economy. Because of the severe restrictions on foreign ownership, the Chinese stock market is not very well developed and is prone to market manipulations. In recent years, the Chinese government has done much to prop up the stock market as its economy goes through transition.

Finally in segment four, I discuss the recent 4×6 index card of financial advice provided by University of Chicago professor Harold Pollack. The professor thinks that simplicity is the way to go.

Stocks Fall… Is It Time To Panic?

PanicStock markets around the world stumbled on Friday. Is this the beginning of the great correction that so many pundits have been calling for? Is it time to panic? The answer of course is nobody knows the future. However, you should be worried if you don’t have a prudent investment process in the first place.

There will always be bumps in the road that will rattle stock markets and investors alike. It takes a prudent investment process and discipline to remain calm and focused on your own goals. If you don’t have a prudent process, or if it is one built on speculation, then the odds are not in your favor.

On the show this weekend, we will chat about how to embrace an investment philosophy that allows you to stay invested through good times and not so good times. *** Also listen for a special offer for some new investment education materials.***

Tune in Sunday morning at 8 AM on KNBR 680 AM San Francisco for Gary Allen on Business.

On the show this weekend, we will chat about how to embrace an investment philosophy that allows you to stay invested through good times and not so good times.

Tune in Sunday morning at 8 AM on KNBR 680 AM San Francisco for Gary Allen on Business.

Gary Allen on Business – Fourth Quarter Market Review Presentation Available

Financial Jungle

Financial Market Review (4th Quarter, 2014)

Often people will ask me, how did the market do this quarter? Keeping score is one of the more difficult things for people to do.  When someone asks how did the market do, there is a simple answer but it only scratches the surface of the right answer in my opinion. It is not as simple as looking up at the scoreboard and noticing the Patriots are beating the Seahawks.

Keeping proper financial score requires forethought about what is important to you. Ultimately, all that should matter to you is how are you doing towards achieving your financial goals. But the world is still fascinated by the concept of beating the market. My opinion on that is who cares! More bad financial decisions have been made by people trying to beat the market.


Of course, the market is still a yardstick, but it should not be the holy grail of profit only if you beat it. Another major problem for people is comparing their results to their friends, family and business associates. That is a very dangerous pastime as well. Just worry about how your doing and you will better off for it.

However, I do understand the fascination about keeping up with how financial markets have done. It is the heart and sole of benchmarking the investments you have. You do need to look at the indices in order to determine how your investments have done compared to the market and its peers.

Market Review

I have linked a quarterly report for the fourth quarter of 2014 to give you an example of one. It contains some slides reviewing financial markets as well as a voiceover explaining in simple terms what happened. Let me know if this is something worthwhile to share with you on a regular basis.

Have a prosperous week!


The Power of Markets

I want to share with you this week a short but informative video that does a good job of explaining why financial markets do a pretty good job of getting the price reasonably right. The collective wisdom of the stock market is explained very well in the video through the use of jelly beans.

Of course, financial market prices gyrate all the time, but that is primarily the direct reflection of new information becoming available. What is quite different from a hundred years ago or even twenty-five is how quickly this new information is disseminated. It would be hard for someone to argue that financial markets are less efficient than they used to be. It also explains in practical terms, why financial markets are so hard to predict. Enjoy the video.

This 2-1/2 minute video explains how security prices are set—and change—based on the collective knowledge of buyers and sellers. Armed with this information, investors can be more confident about the power of the financial markets.

via The Power of Markets.