I Can’t Predict the Stock Market (and Neither Can Anyone Else)

Too often, financial advisors and money managers pretend to have all the answers. These are what are known as “showmen.” Those that think they know for certain what’s going to happen tomorrow or in six months from now are either deceiving themselves or us (or both). The truth is, there are a lot of things money managers, including myself, either don’t know or can’t emphatically answer.

Here are just a few examples. I don’t know or can’t tell you with 100% certainty...

●     If the stock market is expensive, cheap, or fairly valued.

●     The current state of the economy.

●     If oil should trade at $15 or $60 per barrel.

Sure, I have theories, and I have knowledge and research to support my beliefs and advice. These are a lot of things I don’t have an answer to even though I’m in a business where I’m paid to manage investors’ money. But let me tell you something that I do know: no one has the answers to these questions.

There will always be debates regarding stock prices and whether or not they’re valued accurately. This is a pointless debate because no one knows the answer. What we do know is that stocks are expensive based on current valuation measures. But they may not be as expensive if earnings begin to accelerate in the coming quarters. We have pegged our current Cone of Probability for a range on the S&P 500 between 1,700 and 2,150 for this year. But stocks could explode much higher, or an event could trigger a sell-off that drops us below these probability ranges. However, if we stick to our guns and assume that stocks will trade around these levels, there's the potential for a 3% upside and over 20% downside. That is not a good risk/reward ratio. Contrast this with the market's trough back in February when stocks slowed to a downside range potential of 8% and an upside possibility of nearly 20%.

We are currently entering the seasonal period of the year when stocks traditionally have lower returns. Of course, this could be the year that stocks ignore past historical trends and gain traction. While this is unlikely, unexpected events have a way of cropping up and have many times spawned market declines during this period. This year is different than the last three because we’re in the midst of a presidential election, which can cause market volatility.

So what should investors do? I can't answer that with certainty as I don’t know what the stock market will do or what your particular risk tolerance is. However, I can provide you with four tips that I would share with my clients:

1. Know what you own and why you own it.

Whether you manage your portfolio yourself or work with a money manager, you should know what you own and why you own it. Your investments should align with your risk tolerance, and you should be comfortable with your portfolio’s asset allocation. If you aren’t, it’s time to consult with a money manager.

2. Know your investment time horizon. 

Your portfolio and market allocations partly depend on your time horizon. Are you hoping to build wealth and reach a goal within five years? What about 15 or 20 years? How quickly you need to build your wealth will impact how conservatively or how aggressively you invest.

3. Look in the mirror and ask yourself a few questions.

What's going to bother me the most? What will keep me up at night? Am I comfortable watching the markets grind lower and even seeing double-digit losses in my portfolio at some point this year? A money manager, friend, or colleague can’t answer these questions for you. Only you can.

4. De-risk your portfolio.

You need to feel comfortable with your investments. If you don’t, you’ll feel stressed anytime the market adjusts, and you may make a move based on emotion rather than objective judgment. One way to feel more comfortable with your investments is to reduce your portfolio’s risk. At Lumen Capital Management, LLC, our primary method for de-risking is to raise cash. Cash may not pay much right now, but sometimes earning next to nothing is better than losing money. Maintaining appropriate cash levels can help cushion a market decline and give us the opportunity to find value should a market correction occur. It is often easier to make up opportunity than losses, and this is something I'm comfortable with, as I believe my clients are.

While you can’t predict the markets, you can use historical models and research to plan ahead and develop strategies that aim to withstand fluctuations and volatility. Specializing in personalized investment management, we can help you build and manage a portfolio tailored to your risk tolerance, time horizon, values, and goals, both short and long-term. If you aren’t currently working with a money manager, haven’t met with one in several years, or have questions about your current portfolio, I encourage you to reach out for a second opinion and complimentary review.

About Chris

Christopher R. English is a money manager and the founder of Lumen Capital Management, LLC, a Registered Investment Advisory firm. Specializing in investment management and developing customized portfolios that reflect a client’s values and needs, he has nearly three decades of experience working with individuals, families, businesses, and foundations. Based in the greater Chicago area, he serves clients throughout Illinois, as well as Florida, Massachusetts, California, Indiana, and other states. To schedule a complimentary portfolio review, contact Chris today by calling 708.488.0115 or emailing lumencapital@hotmail.com.