Are We Headed for a Crash?

I just read about another guru who is predicting that the market is headed for a great crash. Of course, he is not alone. Andrew Roberts of the Royal Bank of Scotland set off the alarms when he said the banking system was on the cliff edge, and investors should think the unthinkable. It was about to happen. Of course, that was 11 years ago back in 2010. But then Michael Lombardi laid out the reasons for another “Great Crash”, this one much worse than the Great Recession of 2007-9. Of course, Lombardi forecast the collapse would take place before the end of 2013.

What is it with all these prognosticators who sell the idea of a market collapse?

The reality is that they get great press. Just as bad news gets front page coverage and good news may only make a paragraph on the back page, so it holds with investment predictions. The doom-and-gloomers get lots of attention. And investors appear to be listening.

It seems only logical that investors would want to be out of the market when the market is falling and then time their jump back in when it hits the bottom. It is only reasonable to want to miss the worst trading days of the year and yet get in of the best trading days. It reminds me of Will Rogers, who was asked what stocks to buy. He said the best stocks to buy are the ones going up. But what if they go down? Then don’t buy them, he said. Sounds like a great plan.

The issue is, how do you know? The rewards for an investor that can avoid just the 50 worst trading days in a 20-year period - an average of 2 ? days per year - the returns are enormous. $100,000 can grow to $5,156,155! But to the best of my knowledge, I do not know of anyone who has managed this feat. In fact, I do not know of anyone who came close. It is the “Shangri-La”, the “Utopia”, the “Gold at the end of the rainbow” for investors to time the market just right.

Tony Robbins used the example of Ray Dalio of Bridgewater Associates. Bridgewater manages $160 billion in assets and over a 28-year time period has produced an annual return of about 4.5% greater than the S&P 500 total return.?(That is similar to the actual AFC client composite return.)?Robbins sums up as follows:

“Timing the market is basically playing poker with the best players in the world who play round the clock with nearly unlimited resources. There are only so many poker chips on the table. “It’s a zero-sum game.
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So to think you are going to take chips from guys like Ray is more than wishful thinking. It’s delusional.
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“There is a world game going on, and only a handful actually make money, and they make a lot by taking chips from the players who aren’t as good!” As the old saying goes, if you have been at a poker table for a while, and you still don’t know who the sucker is: it’s you!”        

I agree. That is why the AFC focus is on finding exceptional companies with the ability to disrupt current- or create new markets. We believe that is the path to superior returns.

How is your portfolio performing? AFC will do a no-obligation portfolio review to help you understand if you are really on track to meet your financial goals. If we see a problem or have a suggestion for improvement, we will share – no obligation.

A. Michael Adams