The Lessons In A Correction

 

At the end of each year, I write a blog and give a speech on the lessons the markets provided on prudent investment strategy. In most years, markets provide remedial courses, covering lessons taught in previous years—which is why one of my favorite statements is that there’s nothing new in investing, only the investment history you don’t know.

The market “correction” (defined as a drop of at least 10 percent from the previous high) of August provided investors with an opportunity to learn some lessons. In my discussions with investors and advisors alike, I found the usual wide spectrum of lessons learned.

Look through the list and see which, if any, of the lessons listed below describes what you > SEE MORE

Trend Following & Managed Futures

 

A commodity trading advisor (CTA), also known as a managed futures fund, is a hedge fund that uses commodity futures contracts. They use a variety of trading strategies, including systematic trading and trend following—the vast majority of CTAs use strategies based on trends (time-series momentum)—which take long positions on securities that are trending upward and/or short positions on securities that are trending downward. CTAs tout the benefits of diversification and the generation of alpha. Assets under management in this strategy have risen to more than $340 billion.

The intuition behind the existence of price trends is behavioral biases exhibited by investors, such as anchoring and herding, the disposition effect and confirmation bias, as well as the trading activity of nonprofit-seeking participants, such as central banks and corporate hedging programs. For instance, when central banks intervene to reduce currency and interest-rate volatility, they slow down the rate at which information is incorporated into > SEE MORE

An Awakening Bear?

Far more money has been lost by investors in preparing for corrections, or anticipating corrections, than has been lost in the corrections themselves.

—Peter Lynch

On Oct. 10, 2018, the S&P 500 Index fell 3.3%. The 11thwasn’t much better, with the index dropping a further 2.1%, producing a two-day loss of 5.4%. These drops occurred without any bad economic news. In fact, Federal Reserve Chairman Jerome Powell indicated it was the Fed’s view that the economic recovery was robust. And most economists are forecasting continued strong growth into next year.

Looking for an explanation, most market commentators blamed the drop on the expectation that the Fed will continue to raise interest rates. However, the market was already expecting several more rate hikes over the next year. Further, on the 11th, the news on inflation was benign, with the August Consumer Price Index increase at just 0.2%, producing a 12-month rate of just 2.3%. Other explanations were tied to trade-war concerns. However, all of these facts were well-known prior to the 10th, and nothing had really changed.

While markets often move for no apparent reason (think of the recent flash crashes we have > SEE MORE

Finding Fulfilling Work: Live Out Your Calling as an Artisan

 

You likely feel as though you don’t have enough time to watch a video that is 17 minutes and 47 seconds, right? But what if watching it allows you to penetrate beneath the scar tissue of busyness and distraction and transform your view of work and the satisfaction you derive from it? Would it be worth it, then?

If you’re willing to watch the video, please feel free to stop reading here, because I’m convinced that, though seemingly out of context, you’ll get the point by the end of the video—the point that there’s a vastly different, far more rewarding way to do what we call “work” than what most of us have been taught and have experienced. It’s the work of an artisan.

But first, a bit on the evolution and etymology of work: What’s the difference between a job and a profession? I ask this question more than you’d think, and the summary > SEE MORE

Why Emerging Markets Matter

Investing in all risky assets requires discipline, as they all go through long periods of time where they dramatically underperform. This is certainly true of emerging markets. For example, emerging market equities have substantially underperformed the S&P 500 Index in 2018, with the S&P 500 up 6.5% and emerging markets down 4.4% through July.

My colleague, Jared Kizer, examined the evidence on emerging markets and the case for including them in a globally diversified portfolio. He looked specifically at emerging markets by examining five lessons from long-run and current market data that reinforce some of the reasons investors should remain committed to emerging market equity investing.

Following is his analysis.

  1. Over the long term, the evidence indicates emerging market equities have outperformed U.S. equities.

From 1988 (the earliest data we have for emerging markets) through 2017, the S&P 500 earned average annual returns of 12.2% per year, while the MSCI Emerging Markets Index averaged 16.3% per year. In financial jargon, this difference in returns of roughly 4 percentage points would be referred to as a “risk premium,” indicating that markets > SEE MORE