What Really Happened in February?
Last month Melissa wrote a piece about how the media plays with our emotions. She highlighted opposing headlines that appeared on CNBC within 12 minutes during the extreme market volatility we had on February 5, 2018. (Does the Media Play with our Emotions).
This past week I had the opportunity to attend the Managed Risk Funds Forum which presented some interesting information about the market swings from early February.
The Managed Risk Funds Forum is a two-day event for insurance company risk managers. The audience was filled with actuaries, the heads of trading departments from some of the largest asset managers in the world, as well as, senior level executives. It is not an event typically attended by financial advisors working with the retail market. Melissa and I were among the few advisors invited and I later discovered I was the only advisor who attended. It was my first glimpse into the unvarnished opinions and concerns of the highest-level risk managers in the world. After 20+ years in the industry this was the first conference I had difficulty understanding some of the content presented. There was even one question asked that other than recognizing the English language, I had no idea what she asked. Her question started a robust debate. I learned a lot by listening to the presentations and debates that ensued. The forum is where academic research meets with investment company titans.
So what does this all have to do with Melissa’s post and the media reporting on the marketing volatility of February 5th? Maybe we have ‘confirmation bias’ but it would seem Melissa’s thoughts were on the mark.
Contrary to the reporting of CNBC (CNBC reported that risk parity/risk managed funds were largely responsible for the sell-off) – the second largest risk fund manager stated risk managed funds were NOT selling in the manner suggested. He even went further to say that “Once a bad story gets out there, particularly one appealing to peoples fears of ‘the machines’ and other nasty things, it’s very hard to stamp it out.” He also stated, “It takes an awful lot to move global stock markets and the sizes and trading speed of risk parity and trend following strategies just don’t get you there.”*
Werner F.M. De Bond, founding Director of the Driehaus Center for Behavioral Finance at DePaul University has conducted extensive research on the market forecast of top economists. His data set follows economist and their forecast back to 1952.** A few key take-aways
With 64 years of data, the average error for the 13-month forecast was 15%.
He followed with the comment, “If you are an average economist, you are terrible [at forecasting].”
There is no correlation (relationship) between actual returns and predicted returns.
He also stated that Tom Skilling’s forecast for rain tomorrow won’t change the outcome. However, an economist’s forecast will change people’s view of the market and the market itself.
During a panel presentation one economist stated that having your name in a headline on CNBC or Bloomberg, even when wrong, is never a bad career move. You can always walk a comment back with ‘further definition’.”
It would seem the news does indeed focus on the short term.
How many of us really have such short-term goals that today’s market moves are meaningful to the outcome of our goals? The final OUTCOME is the key to a successful investment strategy. Shouldn’t we all be concerned with the obtaining the highest probability of long-term success vs. how we compared to the daily performance of the S&P 500 or DOW?
If you want to know your probability of meeting your retirement income or other long-term goals, we have the tools and resources to calculate it. More importantly we have strategies that are designed to help you improve your outcomes.
Financial media is and will always will be background noise. Occasionally they have a few meaningful nuggets of useful information, but the media company’s goal is to keep us thinking their reporting has critical meaning to our everyday lives. It just doesn’t. Do you really think Jim Cramer will help make you a better investor? If you do, good luck with that!
The best path to achieving your goals is a disciplined, personal financial plan that includes insurance, cash flow, estate planning and investment strategies with your unique circumstances and goals at it’s heart. A holistic approach. That’s what we do, and we do it well.
*Source: AQR presentation at Managed Risk Funds Forum and CNBC.com
**Driehaus Center for Behavioral Finance
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