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CAPITAL IDEAS: Big data: Where is the ‘smart’ money going?

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By Wednesday, Jul 3, 2019 Trade and Commerce 2

Dalton — We financial advisors are supposed to be smarter than individual investors when it comes to placing cash in, and taking cash out of, investments. Envestnet tracked where 96,000 financial advisors moved into and out of for the first four months of 2019, after the crash of December 2018. As you can see above, a large amount of cash was moved into bonds after the crash. Retrospectively that probably would have been considered a cowardly and imprudent move since the stock market rallied. Be they lucky or prescient, those investments worked out well since interest rates have tanked.

Below, you see that, after the crash, there was a big move out of inverse funds (mutual funds that go up in price if the market goes down). That makes sense since the money in those funds had already been made.

I say that we financial advisors are “supposed” to be smarter, but I’m not sure how true that is. Some of us financial advisors pick stocks and/or try to time the market in the short run, even though those strategies constantly fail to add value to returns or risk management to portfolios. I’ll grant you that argument. But some of us know a thing or two, so I wanted to let you see what 96,000 financial advisors are doing so you can consider making those moves yourself, or you can talk to you own advisor about if these moves are right for you.

Here is some more big data for your consideration:

  • 22 – Percentage of survey respondents (financial advisors) who say they plan to decrease their use/recommendation of individual stocks over the next 12 months. (Financial Planning Association Trends in Investing Survey). Buying individual stocks is good for hope and ego, but less so for returns and risk.
  • 44 – Percentage of survey respondents (financial advisors) who say they plan to increase their use/recommendation of exchange-traded funds (ETFs) over the next 12 months (FPA Trends in Investing Survey). The use of inexpensive and tax-efficient ETFs is a two-decade-old trend, the value of which is on the verge of being understood by both financial advisors and individual investors.
  • 55 – Percentage of survey respondents (financial advisors) who say clients have asked about investing in marijuana companies in the past six months. (FPA Trends in Investing Survey)
  • 13 – Percentage of millennials who are interested in opportunities that align with their values, regardless of financial return. (Tonic)
  • 15 – Percentage of millennials who say they feel stressed about investing (BMO Wealth Management)
  • 40 – Percentage of Gen-Xers who prefer to buy-and-hold for the long-term. (BMO Wealth Management)
  • 43 – Percentage of boomers who prefer to buy-and-hold for the long-term (BMO Wealth Management)

From big data to market data, the S&P 500 posted its best first half of a year since 1997, soaring 17.3 percent and reaching a new high. All 11 of the index’s sectors rose over that time, with Technology leading the way with a rise of more than 26 percent and Energy lagging the group with a 7.1 percent gain. Despite that surge, stock market valuations still look rather contained compared with the 2018 peak.

 

Don’t fight it

There are lots of sayings in the business of professional money management. Two of the most tried and tested are “don’t fight the Fed” and “don’t fight the tape.” Not fighting the Fed can take on a few different nuanced interpretations but, in general, it means that the Federal Reserve is keeping interest rates and the money supply accommodative. And as discussed in last week’s column “Fuel for the fire,” the Fed indicated it is willing to cut interest rates if a trade war dampens economic growth. In that column I also explained that, when President Trump and China’s President Xi met last week, a deal didn’t need to be struck to make the market happy—a couple of tweets about it being a “tremendous meeting” would be enough to put smiles on the faces of traders. If the Fed was fuel, apparently positive communication about trade between the two presidents was a gratuitous splash of kerosene, as the markets have been receptive to the outcome. We’re not fighting the Fed, and we’re not fighting the tape. The etymology of referring to the trend of the stock market as “the tape” is based off the way traders used to read volume and price data of stocks as printed on a ticker tape sent through a telegraph. What it means is that there is nothing more bullish than prices going up. While prices are only up nominally going back about 17 months, they have absolutely been on fire over the last six.

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Allen Harris, the author of ‘Build It, Sell It, Profit: Taking Care of Business Today to Get Top Dollar When You Retire,’ is a Certified Value Growth Advisor and Certified Exit Planning Advisor for business owners. He is the owner of Berkshire Money Management in Dalton, managing investments of more than $400 million. His forecasts and opinions are purely his own. None of the information presented here should be construed as individualized investment advice, an endorsement of Berkshire Money Management or a solicitation to become a client of Berkshire Money Management. Direct inquiries to aharris@berkshiremm.com.


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2 Comments   Add Comment

  1. Elliott Morss says:

    I quote Georgetown University finance professor James Angel: “One of the open secrets of the financial-services world is that we’re also in the entertainment and gaming industry.”

    I quote Warren Buffett:

    “Over the years, I’ve often been asked for investment advice, and in the process of answering I’ve learned a good deal about human behavior. My regular recommendation has been a low-cost S&P 500 index fund. To their credit, my friends who possess only modest means have usually followed my suggestion.”

    1. Allen Harris says:

      Mr. Morss, I wholeheartedly agree on both quotes. I must admit that I don’t know the context of Mr. Angel’s quote, but on the surface it sure is accurate – silver-tongued salespeople and playing with statistics (and that’s probably being generous on my part to assume the assessment of probabilities).

      Regarding Mr. Buffett’s quote, I’ve been saying that for twenty years (it took me a few years in the industry to realize the futility of chasing gains, as well as the risk in doing so if your financial plan reveals that you don’t even need those returns).

      Investors do not need a financial advisor if their only goal is to beat the market – heck, they can simply buy leveraged funds. (Of course, one problem is that a lot of people don’t really know what they are planning for, so they just assume that the answers to the unknown questions is just investment performance,m but I digress.) In any calendar year some 80%-plus of money managers actively trading stocks will under perform their benchmark (according to MorningStar), and that those bouts of out performance are random (suggesting luck, not prowess). Therefore, buying inexpensive and tax efficient ETFs tracking the major indices will likely yield greater returns than trying to time the market or buy the best stocks. Of course, the problem with that theory is implementation – https://advisors.vanguard.com/iwe/pdf/FASQAAAB.pdf – but I certainly subscribe to that theory.

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