This article is part of a regular series of thought leadership pieces from some of the more influential ETF asset managers in the money management industry. Today's article is written by Michael McClary, chief investment officer of Akron, Ohio-based ValMark Advisers, which markets the “TOPS” brand of asset allocation models.
From an early age, we are instinctively driven to ask “Why?” Likewise, we have all been taught that "you can't judge a book by its cover."
Through further training, we learn to research and analyze situations to find the root cause. However, too often we skip the research and analysis and just take things for face value. The 24-hour news stations don’t help, as they provide a daily one-liner on why the market rose or fell.
We don't deserve all of the blame though. Economics and financial markets are fraught with circular references and feedback loops. It's not as simple as one cause and one effect. There are literally thousands of potential inputs into a financial model, so we are left to pick certain ones and go from there.
Performance: A Book’s Cover
Potentially due to the overwhelming amount of information available, investors often fall on the most straightforward and readily available piece of information on an investment—recent performance. We would equate making decisions primarily based off of recent performance to judging a book by its cover.
If judging primarily based off of recent performance, it would be easy to overweight U.S. stocks and underweight international stocks and other diversifiers. U.S. stocks have outperformed international stocks in the last one, three and five years by a significant margin. That is like five straight world championships—hard to bet against that at face value.
In this article, we will explore two root causes for recent disappointment in diversified portfolios and frame some thoughts for decisions going forward. We will focus on:
- The strong U.S. dollar
- Historically low oil prices
Are You An Investor Or Speculator?
Many investors would agree that speculating on short-term currency and oil prices is a loser’s ballgame. However, we see investors reducing exposure to many asset classes that have underperformed importantly due to the strengthening in the U.S. dollar and significant drop in the price of oil.
This leads us to ask, "Are you an investor or speculator?”