Selecting Time Horizons is Critical to Investment Success - Weekly Blog # 634

Mike Lipper’s Monday Morning Musings

Selecting Time Horizons is Critical to Investment Success

Editors: Frank Harrison 1997-2018, Hylton Phillips-Page 2018 –

To feel successful we play games with ourselves. Both the sports and business pages are filled with “puff” pieces about the extraordinary successes of a limited number of people. We could choose to model ourselves against them, but should we? For a very brief period at age 21 I was disappointed that I, like Alexander the Great, had not conquered the known world. I quickly learned to find more achievable goals, which have changed throughout my life. Those lessons have been applied to the construction of client and personal investment portfolios. One of the advantages in managing portfolios of funds and securities, distinct from having all my assets in a single business, is that I can segregate the single portfolio into distinct time horizon sub-portfolios.

Now I believe it is critical that we recognize that we may be changing speed and direction for up to nine months. Since the 19th of March we have seen average mutual fund performance gains of +37.22%, led by small-cap growth +45.37%. Even “Value” funds on average have risen +30.88%. (As expected, some sector funds did even better:  Equity Leveraged Funds +68.51%, Energy MLP +67.51%, and Precious Metals +51.60%) Above average performing funds did even better than their peer averages. Large gains in a short period of time are historically unsustainable.

Most of these gains were produced early in the last 12 weeks. Market analysts warned that a sustained period of base building performance would be needed for a successful attack at the old highs. However, over the next nine months or so the US stock market is likely to be challenged by other hurdles, as shown below, some not generally accepted at this time:

Medical

1. Two distinct additional bouts of COVID-19 are expected, the initial bout, an echo of the first wave. The second in coming in the fall/winter when we normally face the respiratory flu. Typically, deaths from the flu are in the same order of magnitude as the Coronavirus. What we do not know is whether it will impact the “normal” flu. 
2. There are many attempts at potential vaccines and therapeutic medicines that could help, but some will not work as expected. Furthermore, regulatory and manufacturing/distribution issues will need to be managed.

Political

1. While the mass of investors in most of the world are focusing on the US Presidential election, I as is typical am looking elsewhere. The majority may well be correct in their predictions, but as is often the case the impact may already be reflected in market prices.
2. Whatever the result of the presidential election, the odds favor the following longer-term results: 
1. The winner will not be sitting in The White House in 2025, which will weaken the political power of the President.
2. Members of Congress not planning to run in 2024 will focus on the 2022 Congressional elections, where the sitting President will be of less support and power.
3. Within each party there is a growing split. The leadership in both houses may not have the support of both the younger members and the potential presidential candidates.
4. The political structure of the key congressional committees will evolve and it will not be easy getting legislation out of committee and on to the floor. My guess is that we won’t really understand the “inside baseball” until at least March, with little legislation passed until at least May.
3. The key investment battlefield will be in the House, where tax legislation must start. Additionally, the country will be facing various inflationary threats as almost all federal, state, and local governments attempt to get more money. Businesses will also be trying to make-up for the losses or low income of 2020. Some of the inflationary forces will come through legislation and others through the commercial markets. 

Investment Time Horizons Implications
Each investor should set their own schedule of time horizons. At a minimum they should have three: short, intermediate, and long.

• As a guide, but only a guide and not a requirement, I suggest the short horizon cover family needs, like education. 
• Since we have come out of this recession in reasonable condition, I recommend the intermediate time horizon portfolio be utilized to get through the next recession, which could be worse than the present one. 
• The third time horizon should likely be used for long-term medical expenses and estate planning. 

I might assign 20%, 30% and 50% of assets to each sub-portfolio, respectively. You might be different. I am perfectly willing to accept returns near the bottom for my short-term time horizon portfolio. Others may find that too worrisome. I am not too concerned about the near-term hurdles, unless the results generated by the short-term portfolio threaten the ability to fulfill the desires of the second and third buckets.

Addressing Valuations
In my mind I divide stock price valuations into four buckets: bargains, fair, full, and dangerous. Earlier this year I believed that most prices were in the fair bucket, meaning the upside and downside potential were roughly in balance for my short-term sub-portfolio. We may now have passed into the fully priced bucket, at least until the issues mentioned above are resolved. Fully priced suggests there is some short-term price risk, along with less short-term gain. In terms of my intermediate bucket current prices seem to be in the fair range, with a little more upside than downside. My current view is that my long-term portfolio has much more upside potential than downside. As you can see, the investment horizon dictates a view as to valuation/risk.

Current Evidence
On Friday we saw an expansion in trading volume on the NYSE, with stock prices bouncing in both directions. What I found of interest was the volume of trading in mutual fund management stocks, which jumped. In some cases the companies had good performing funds and in others they were turnaround candidates. Apparently the buyers thought the near-term market favored both.

In the WSJ on Saturday, 76% of the weekly prices of currencies, commodities, ETFs, and security indices rose. Contrary to central bank led pundits, it seems increasing clear we will be undergoing inflation in the near-term future. One of the stock groups not going up and in some cases declining, are REITs. This fits an increasingly popular view that the “new normal” will see less profitable malls and office buildings.

As a contrary indicator, the latest American Association of Individual Investors (AAII) sample survey shows an increase in the number of people bearish for the next six months. This is viewed as positive by market analysts. The AAII sample has three choices Bullish, Bearish, and Neutral, with bearish the clear leader. A more positive view for the intermediate-term can be gleaned from a recent brokerage report showing the stock markets of 73 countries in a base building pattern, measured by their advance-decline lines.

Conclusion
For long-term investors, expect some increase in short-term volatility with some temporarily give back of the extraordinary early Spring gain. Life will become clearer by Spring of 2021. The long-term remains positive.

What do you think? 


 

Did you miss my blog last week? Click here to read.
https://mikelipper.blogspot.com/2020/06/data-driven-reactions-dangerous-weekly.html

https://mikelipper.blogspot.com/2020/06/caltech-data-heretics-go-to-track-for.html

https://mikelipper.blogspot.com/2020/05/mike-lippers-monday-morning-musings_24.html



Did someone forward you this blog? 
To receive Mike Lipper’s Blog each Monday morning, please subscribe by emailing me directly at
AML@Lipperadvising.com

Copyright © 2008 - 2018

A. Michael Lipper, CFA
All rights reserved
Contact author for limited redistribution permission.