After circling the sun, human nature likes to look back at the last 365 days and look forward to the next. It's very healthy to take stock of the last year and solidify your plans going forward. However, there's also a propensity. We also like to look to experts to tell us what to expect in the next year. When predicting celebrity weddings or Superbowl champions, it's harmless fun. When making financial decisions, it can lead to trouble.
For instance, take a look at this article in WalletHub.com. The editors at Wallethub.com have done a decent job over the years of predicting broad economic trends. However, one passage was off by a long shot:
The S&P 500 Won't Do Much Better Than An Online Savings Account
The stock market has been on a tear since the U.S. presidential election, but don't expect that to continue indefinitely. Stocks are still quite expensive, after all, with shares of the average company in the S&P 500 trading at roughly 26 times earnings, compared to a historical average of just under 16 times.
That's why we expect the S&P to finish 2017 at about 2,288, which represents a gain of just 0.75% from current levels. For context, the average online savings account has a 0.65% APY, according to WalletHub's latest Banking Landscape Report.
Had you read that passage on December 31st waiting for the ball to drop in Times Square, you may have been discouraged from sticking to your plan. Hopefully, you would have ignored this prediction. Because by the end of the year, the S&P 500 index was up over 19%, even without reinvesting dividends. Missing out on the performance that this index would contribute to your overall allocations can be detrimental to your long term goals.
Too often, investors make predictions and place "bets" with their portfolios. Here at Privada Wealth Management, we use modern portfolio theory to create an appropriate allocation. However, we also add technical analysis and tactical strategies. The goal is to predict what will be less and participate in what is more. In other words, our job isn't to position a portfolio based on what the markets "should be" doing. Instead we make objective, rules-based allocations based on what the market has been doing.
This topic of technical analysis and tactical strategies is quite involved and we'll cover the concepts more in the future. If you'd like to see how they fit your unique situation, click here.