By Peter Mauthe This week I was listening to an expert on investor psychology who stated, “Investors feel comfortable investing when markets are behaving as they expect .” That made me think about the piece I recently wrote about the emotions of fear, uncertainty, and doubt (FUD) and their often negative influence on investors’ decisions. It also made me think back to conversations I have had with investors and advisers over the past three months about the many uncertainties we have all had to face, including a contentious national election, a global pandemic, and an uncertain economic outlook for 2021. Many of these discussions have been about the expectations surrounding these uncertainties. Some feared that the election outcome would lead to a bad market environment. Compounding that fear was the uncertainty and doubt resulting from the pandemic and the expectations that it would suppress the global economy and harm the world’s markets. Expectations like these are often based on news headlines designed to provoke emotion, not to inform investment decisions. In light of this, it is understandable that many people expect the immediate future to be bleak for their investments. This is despite interest rates being near their lowest levels in generations and the stock market nearing all-time highs. Unfortunately, these expectations are leading some investors to make detrimental investment decisions based on the least reliable and least important information. Investment decisions should be based on what is—not what is expected Of course, news about global politics, economics, and currency issues is important to us here at Flexible Plan, which is why we subscribe to so many direct news feeds. However, those expensive news feeds do not direct our investing decisions. That is why we also pay for multiple market data feeds, so we can quantify what is actually going on in the economies and markets around the world and respond accordingly. Consider the pandemic and its influence on the economies of the world. While market headlines have caused some investors to miss investment opportunities this year due to fear or low expectations, market data has indicated that markets are anticipating a strong post-pandemic recovery for the global economy. Furthermore, market data has directed our strategies to take opportunistic positions in stocks, bonds, and alternatives for much of the year. It is important to understand that these rewarding positions were taken because that is what the market data indicated was appropriate. At Flexible Plan, investing decisions are made by a rules-based methodology that is quantitative and objective. There is no investment committee to debate current events or any expectations based on the fears, uncertainties, and doubts about the future of markets. That, combined with nearly 40 years of experience in dynamic risk management and strategic diversification, is a recipe for portfolio success in a rapidly changing world. Historical examples Let’s put this into the context of memorable investing moments before 2020. The following graph is a snapshot of the market since December 31, 1997. I have to admit, my expectations back in 1997 did not include the economic, social, and political upheaval and advancement we have seen since then. Over that period, we experienced all of the following: - 6 presidential elections. - A war in the Middle East that lasted more than a decade. - The collapse of a massive tech stock bubble. - A financial crisis that almost brought the world economy to its knees. - A global pandemic that changed the economic and political landscape of the world in a matter of months. During this time, many buy-and-hold stock investors had to endure an 11½-year period (represented by the dotted line in the graph) with total returns near 0% and two 50%-plus declines in stock market value. Gold investors fared better than most realize. This is one of the several reasons we include gold in our strategically diversified portfolios. (See the 2020 update of our white paper “The role of gold in investment portfolios” for more information on the function of gold in portfolios and the optimal allocation based on our findings.) During this time, investors enjoyed a bull market in bonds, but along the way, they also experienced some of the bonds market’s most volatile times. I am sure many of us can remember how we felt when giant tech firms went out of business in 2002–2003, and when Lehman Brothers failed and Merrill Lynch had to merge with Bank of America in 2008. Those were the scariest of times—that is, until we went crashing into the COVID pandemic. For those relying on expectations, the scary times present many chances to make bad decisions. The same can be said for the really good times—such as 1999 going into 2000, 2007 prior to the financial crisis, and early 2020 when unemployment was the lowest it had been in more than 50 years. Overly optimistic expectations can present their own problems and also lead to poor decisions by investors. Managing expectations can lead to better investing There is no “silver bullet” or single answer to investing success. There are certainly many time-tested guidelines that will help manage both the risk and the return that investors experience from their portfolios. We employ many of those guidelines in our dynamically risk-managed strategies and portfolios. While we do not make investment decisions based on expectations for the markets, we can help investors manage expectations for their portfolios through the use of our innovative OnTarget Investing process, which develops custom benchmarks based on an individual’s investment goals, risk profile, and time horizons. The markets of the future will bring their own bullish and bearish surprises. While investors will almost certainly continue to develop market expectations based on the headlines, we will continue to deliver quantitative, objective, dynamically risk-managed portfolios based on the data that changing economies and markets present.