After a Year of Faulty Predictions, 3 Approaches to Investing
After a Year of Faulty Predictions, 3 Approaches to Investing
By PAUL SULLIVAN
There is one thing analysts can agree on about the year that is coming to a close: 2016 confounded predictions and expectations. From how stocks would perform to who would win the presidency, this was a bad year for people who tell us what tomorrow will bring.
So as people take stock of what has passed and wonder about what’s to come, is there anything to latch on to for guidance? Or is rolling dice just as likely to yield a useful forecast?
As my colleagues have written this month, most year-end predictions are useless, particularly those that portend to pick a sector that is set to soar or dictate how the stock market will perform. But this seemingly clear futility, of course, does not mean that analysts will stop making predictions or that people will cease to seek meaning in various indicators, even if they have proved mostly wrong or right only by random chance.
You will not get any predictions here. Instead you’ll get a look at three reasonable approaches — call them the 3 C’s — that investors can take to prepare themselves for next year or any year.
The Company Approach: This approach isn’t about guessing where a stock price might finish the year; it’s about looking at how companies are performing and assessing their fundamentals.
The argument here is that a company’s fundamental sales and earnings potential can be analyzed. And while individual investors have been cautious about investing money in the stock market over the last several years, company earnings have continued to be strong.
“With so much negativity out there, you still have to put your money somewhere,” said Thorne Perkin, president of Papamarkou Wellner Asset Management. “We’ve had a theme of U.S. pre-eminence, which we’ve had for years. U.S. equity is the place to be.”
Some of the company approach has its basis in how stock markets typically perform. About three-quarters of the time, they go up. And consumers keep buying things.
Of course, if there is some external shock — say, a trade war or a foreign policy crisis — then it could affect how, when and where companies sell things. And this uncertainty is where the company approach can have pitfalls: What is known now is not everything.
The Consumer Approach: If there is one popular barometer of how people feel, it is consumer confidence. In December the Consumer Confidence Index was up after rising in November as well. A related indicator about consumer expectations was up even more sharply this month.
“Consumer confidence improved further in December, due solely to increasing expectations, which hit a 13-year high,” Lynn Franco, director of economic indicators at the Conference Board, which tracks consumer confidence, said in a statement.
But there was a caveat: “The postelection surge in optimism for the economy, jobs and income prospects, as well as for stock prices, which reached a 13-year high, was most pronounced among older consumers.”
Stew Leonard Jr., president and chief executive of the Stew Leonard’s grocery store chain, which operates in affluent areas of Connecticut and New York, has his own way of measuring the economic sentiment of his customers: He calls it the mashed potato index.
Mashed potatoes that are prepared in the store cost about $4 a pound, compared with $1 a pound for potatoes. But with plain old potatoes, you have to peel, cook and mash them yourself.
Yet the price disparity between the two is so great — some 400 percent — that when Mr. Leonard sees customers buying more prepared mashed potatoes, he stocks the shelves with more high-end food. Customers are feeling flush with cash.
“There isn’t even a close parallel as far as cost goes,” he said. “It’s timesaving.”
This holiday season, he said, mashed potato sales were up 31 percent from last year. Catering, he said, was also up 15 percent, and sales of bottles of wine above $20 have also increased since the election.
“We’ve got these things in the store that I rely on a little bit,” Mr. Leonard said. “I don’t bet the ranch on them, but I keep an eye on them. I really do think they’re a precursor of what’s to come.”
Yet by the time Donald J. Trump begins his presidency, Mr. Leonard said, his leading indicators will be less reliable. “I can’t really read January or February that well,” he said. “Everyone is on diets.”
The Control Approach: For many affluent investors, crunching corporate numbers or assessing prepared food sales — and having time to do both often enough so that the results are meaningful — isn’t realistic.
There is one option, however — particularly after such an unpredictable year — that all investors can embrace. It’s an approach that allows them to manage the only thing that any investor can control: having a saving, spending and investing plan and adhering to it just as surely when stock prices fall in value as when they rise quickly.
As we all know, advice to create a financial plan is akin to recommending a diet after a holiday season of gluttony. Most of us know it’s what we need, but sticking to our resolve beyond the first weeks of the year can prove difficult. (After all, Mr. Leonard knows his consumer indicators revert to the mean after the dieting months of January and February are over.)
But several advisers have suggestions on how to keep people sticking to their plans. One of them is thinking negatively about the year.
“If I had had a crystal ball, and it said the U.K. would vote to leave the E.U. and that Trump would win the election, it would have never occurred to any of us that the response would have been a really ebullient stock market,” said Seth Masters, chief investment officer of Bernstein, which manages portfolios for AllianceBernstein’s private client group. “So what you need to do is have some thoughtful risk management and predict all the ways you think you can be wrong.”
Sounds like a depressing way to begin a new year, but Mr. Masters explains that concentrating on potential risks is one way to get investors to stick to the long-term plans they created.
He said the plans that the firm set up for clients before the 2008 crisis had accounted for the risk of a recession like the one the United States went through. The plans did not place a high probability on such a collapse, but they did chart a course through it.
“We spent a lot of time speaking to clients that there could be a lot of bumps in the road, and that the only way a plan could work is if you stuck to it even when things were terrible,” Mr. Masters said.
Of course, during the crisis many investors panicked just as assets were at their lowest. “The industry may have been putting plans together, but the evidence is pretty damning,” Mr. Masters said. “At every dip, there have been huge outflows into bonds from equities at the exact wrong time, and then money back into stocks at the wrong time.”
What’s the solution? Instead of panicking, investors should rebalance their portfolios — meaning that they should adhere to the allocations set out in their plan. This goes for good times, too, when people are more likely to let positive returns knock their portfolios out of balance.
“I’ve seen so many people come in, and they create a plan and then they take it home and never touch it again,” said Darrell L. Cronk, president of the Wells Fargo Investment Institute. “Keeping it alive, changing it, adjusting it as the return structure changes — we plot a line to make sure people are staying on that plan.”
“There are no epiphanies,” he added. “Discipline, discipline, discipline is going to get you a lot farther down the path when emotions ride high and you most want to make those decisions” that deviate from the plan.
While this sounds a lot more boring than telling people to buy a certain stock or bet the farm on a commodity, focusing energy on a plan is going to get people a lot closer to their goals in 2017 and beyond.
Besides, as Mr. Masters said, “No one will have the right list of surprises for you, and if they did, you’d think they were nuts.”
A version of this article appears in print on December 31, 2016, on Page B3 of the New York edition with the headline: Forget About Forecasts and Go Back to the Fundamentals.