Monthly Outlook: July 2017
June was yet another good month for market returns. U.S. stocks have been up‐trending since March 2016, some 15 months ago. Non‐U.S. or international stocks have been up‐trending since July 2016, almost a year ago. And bonds turned up recently in April. We’re sounding like a broken record when we say “up, up!” Let’s enjoy it while we’ve got it. For the month of June, U.S. stocks (Russell 3000) gained 1.1%, international stocks (FTSE All‐world ex‐USA) added 0.5%, and bonds (Barclays Aggregate) edged 0.1% higher. More importantly, all asset classes continue to up‐trend (more on what that means later). We remain fully invested, capturing gains, and watching carefully with eyes wide open. It makes for an enjoyable summer.
Looking Directly at the Price
If you really think about it, the point of making an investment is to buy something at one price and sell it later at a higher price. If it pays a dividend or interest along the way, that’s all the better as they add to the total return. Many investors scour data for clues and insights that they think will help them find underpriced opportunities. They look for a product improvement, a management change, some kind of demographic shift, or whatever. If only they could find the secret! But if it’s price appreciation that we’re really after, why not look directly at the price and trend? The fundamentals are just clues about what the price ought to do, but the price is what really matters. If the price is trending down but it ought to be moving higher (says you), then you’d be better off financially by selling it vs. being “right” and losing money. It’s amazing how many “value investors” stay stubbornly invested in a losing position because they “just know” their analysis is right and that someday “the market” will catch on to their opinion. We sarcastically like to say “we’d rather make dollars than sense.” Using charts, we can, indeed, look directly at prices and trends and know if we should be fully invested or under‐invested. Of course we consider economic fundamentals, monetary and fiscal policy, valuations and more, but price and trends win every time. We
look at every holding every day to confirm the price trend (up or down) and invest accordingly. Trends can last months or years but we’re always watching.
What We Mean by Trend
The starting point of investing is to develop a diversified asset allocation plan that will balance your wants and concerns. Then we have to select our investment choices to fill the allocation. We can build your portfolio with individual securities, mutual funds, or index funds and ETFs (our choice). That’s the easy part. Then we have to know when to buy/hold/sell each of your holdings. We favor watching the price and trend. The trend is just a moving average of the daily price. We like to use long‐term moving averages (like the 200‐day moving average) to ascertain the long‐term trend. We’re not that concerned about the daily or weekly zigs and zags. As long as an index fund or ETF price remains above its trendline (moving average) then we say it’s up‐trending and should be held. Conversely, when the price crosses below the trendline, we sell or trim. Of course, our signal is a bit more complicated than that, but that’s the essence. The takeaway from this discussion is that our iFolios strategy and signals are based on facts, looking directly at the price and trend, and not on guessing. It’s a disciplined approach to keep us fully invested most of the time but protected (by selling) only when price trends start to decline. We know we can’t predict the market – no one can – and our strategy doesn’t require us to. We just have to stay vigilant and watch for trend reversals.
As we start the third quarter of 2017, nearly all of our index ETFs are up‐trending (now you know that means their price is above their long‐term moving average). We don’t have to guess about the future and we don’t have to worry. We can talk about the news and analysis, but it won’t help. Instead, we’ll design intelligent asset allocations, use low cost index ETFs, and look directly at the prices and trends. That’s how we grow and protect.