LinkedIn Q&A: My Response to a VERY GOOD LinkedIn Question on My MYTHBUSTERS EDITION

A Follow-up Discussion on LinkedIn about My Latest Article

In the dynamic world of content creation, one of the aspects I cherish the most is the opportunity to engage with my followers. The exchange of ideas, perspectives, and, most notably, the intriguing questions posed by my audience serve as a perpetual source of inspiration. Today, I find myself compelled to share what transpired during the creation of one of my recent articles:

Exposing Myths of Investing: The Shocking Truth About Missing The Market’s Best Days!

I am always humbled and particularly fueled by the inquisitive spirit of those who follow my work. It’s a testament to the symbiotic relationship between creator and audience, where questions don’t merely seek answers but act as catalysts, propelling the evolution of ideas and paving the way for articles that resonate with the curiosity of my dedicated followers. In this particular journey of exploration, I am thrilled to be able to engage with a wonderful connection of mine Dr. Donald Moine. I thoroughly enjoy his posts, and our interactions have been great. Feel free to follow him as I put a link to his LinkedIn profile above.

Dr. Donald Moine asks:

DM: Joe Macek. I have read many articles on this subject and yours is one of the very best being comprehensive and well-balanced.

JOE: Thank you so much for your kind words about my article on the subject. I’m humbled to hear that you found it comprehensive and well-balanced. Your positive feedback means a lot to me, and it motivates me to keep creating content that you and others find valuable. Thanks again for taking the time to share your thoughts!

DM: The question is how does a person avoid the worst days in the market? Even using simple moving average cross-overs can help. There are a number of other indicators you can use and combine with one another.

JOE: Navigating the complexities of the financial markets is no easy feat, and the quest to completely sidestep the worst days poses a huge challenge, potentially resulting in missed opportunities during more favorable periods — as detailed in my previous article. The short answer is, that there has never been and will likely never be a foolproof way to predict severe market drawdowns or Black Swan Events. That’s why they are called BLACK SWANS — You don’t expect them. However, I often draw parallels between market liquidity, to the ebb and flow of ocean tides, where capital moves in and out cyclically, and I do believe the markets can become vulnerable to Black Swans — which can require many investors to reduce risk in their portfolios.

While using simple moving average cross-overs can be helpful, I’ve discovered that the yield curve is much more reliable. Paying attention to the yield curve, along with keeping an eye on other indicators can give you a more accurate picture of where the market might be headed — although again — nothing is foolproof. Combining indicators can help make smarter investment decisions by considering both short-term and long-term trends, and can help improve the chances of success in the ever-changing market.

In a detailed video presentation, I explore the role of the yield curve as a reliable indicator of recessions and significant market contractions.

Here it is for reference:

DM: You can also exit, or move more of your portfolio to cash or bonds when the volatility index rises above a certain threshold.

JOE: Certainly, while some investors opt to exit the market or shift more towards cash or bonds when the volatility index surpasses a specific threshold, my experience has led me to view cash and bonds as less effective substitutes. In anticipating a market downturn, I have found that incorporating market-neutral and alternative funds into a portfolio tends to be more advantageous. These funds often exhibit a level of resilience and flexibility that can help mitigate the impact of market volatility. Unlike cash or bonds, market-neutral and alternative funds may offer opportunities for returns even in challenging market conditions, contributing to a more robust and diversified approach to portfolio management during periods of anticipated downturns.

I Also Posted a Video On This Very Topic Here:

DM: It is difficult to beat the indexes and that is why so few mutual fund managers or portfolio managers are able to do so on a long-term basis.

So Let’s Remember Why The Indexes Were Created in the First Place:

JOE: Stock market indices were created to provide a comprehensive measure of the overall performance of the stock market, serving as a benchmark to gauge the health and trends of the broader economy. The concept emerged as a means for investors to track the collective movement of representative stocks and assess the market’s performance as a whole. One of the earliest and most iconic indices is the Dow Jones Industrial Average (DJIA), created by Charles Dow in 1896. Comprising 12 industrial companies at its inception, the DJIA aimed to reflect the health of the American industrial sector. Over time, it expanded to include 30 major companies, encompassing a broader spectrum of industries. Today, indices play a crucial role in providing investors with insights into market movements, aiding in portfolio management, and acting as benchmarks for investment strategies and financial products.

Over time, people started thinking that investment experts should always be able to do better than the general market. This idea comes from the belief that these financial professionals, with their knowledge and tools, should be able to make smart decisions and get better returns.

Financial professionals are not primarily hired to outperform the market; their main goal is to earn a risk-adjusted return and guide clients through the emotional aspects of investing. The role of financial professionals extends beyond merely chasing market-beating returns. Instead, they are tasked with understanding a client’s financial goals, managing risks, and devising strategies that align with individual needs and risk tolerance. Moreover, a significant aspect of their work involves providing emotional support and guidance, especially during market ups and downs. The ultimate aim is to help clients retire comfortably by navigating the complexities of financial markets, ensuring a balance between risk and return that aligns with the client’s long-term objectives.

Beating the Index is not Generally Possible, as The Index has a Different Set of Rules…

Trying to consistently beat the market index can be like playing Monopoly against an opponent with unlimited funds when you’ve got a starting capital of just $2000. Here is a small list of things the index does not have to do, but you as a person you do have to do:

1) The index will never pay any commissions, fees, or taxes. You will. There are all kinds of costs involved in making investments, from the traders to the exchanges, to the software, to the hardware, and people working behind the scenes. The infrastructure surrounding the markets costs money — which you eventually will pay for if you decide to invest. Not only that, when you make money taxes are due!!

2) The index never keeps cash handy for emergencies and is always 100% invested. You aren’t. If you maintain cash for any reason whatsoever — expected expenses, taxes, or other surprises, your performance will always lag the benchmark index. I mean, what emergencies does the SP500 have to save for? Nothing! You on the other hand should be having some cash on hand for whatever life throws at you.

3) The index has no life expectancy requirements, doesn’t retire, and will live on — but you won’t. While it may sound great that if you just hold an index long-term you will generate 8–10% annual returns, the reality is that the older you get and the closer you are to your retirement age the less of an appetite you will have for risk of loss because you don’t have the years to make up for it. The index doesn’t retire or worry about massive losses…

(I am currently writing an article to examine just that! Passive Investing into Retirement and whether or not it's a good idea! — STAY TUNED)

4) The Index does not have to withdraw money to pay for food, shelter, and other bills…You do. At some point when you can’t work anymore, you will need to begin withdrawing money to live on, at that point your performance will be affected by the withdrawals against the value of the portfolio.

5) The index can take on wild, obscene, incredibly silly risk and frequently does…you can’t. If you take on the same risks as the index at certain points in your life you could be faced with losing a large amount of your principal, starting over, and having to go back to work for the rest of your life when you can't work. The index doesn’t have that problem. If the index loses 56% like it did in 2008, it doesn’t have to recover, but you do.

6) The Index can substitute bankrupt companies without losing money — you can’t. In an index, if a company goes bankrupt, the index simply takes it out and substitutes another stock in its position. The index value is then adjusted for the “market capitalization” of the new entrant and the index resumes. It POOF puts the money back in as if it never happened! However, in your portfolio, given you only have a “finite” amount of capital, when a company goes bankrupt, or loses the majority of its value, you have to sell that stock at a loss and buy the replacement with whatever is left or add more capital.

I believe that trying to beat the index as the main metric for success is not the best approach. The index operates under different rules, representing a broad market picture that individual investors might find challenging to surpass regularly. Instead of playing a game where I truly feel the odds are stacked against you, focusing on your own financial goals, and risk tolerance, and adopting a strategy that suits your circumstances might lead to more meaningful success in the world of investing.

The Question isn’t Whether a Professional will Outperform the Index, The Question should be will you Outperform a Professional?

On average, individual investors, even when using index funds, often find it challenging to match the performance achieved by financial professionals. Numerous studies indicate that working with a professional advisor increases the likelihood of a higher net worth, greater satisfaction, and increased confidence in retirement planning compared to going it alone. Professionals bring expertise, market insights, and a disciplined approach to investment management, helping investors navigate the complexities of financial markets. Their guidance goes beyond selecting investments; it includes comprehensive financial planning, risk management, and emotional support during market fluctuations. Collaborating with a financial professional can significantly enhance an investor’s ability to achieve financial goals, providing a sense of security and peace of mind as they approach retirement.

Thank you for your fantastic comment! I appreciate your insights and am glad to have the opportunity to discuss these points with you. I hope my response adequately addresses the topics you raised. If any readers of THIS ARTICLE have any further questions or thoughts, feel free to share them — I’m here to help answer in the best way that I can!

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Joe A. Macek, FMA, CIM, DMS, FCSI

Investment Advisor, Portfolio Manager

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