It’s A Fool’s Errand

|During the last financial crisis, a manager at UBS commented that every investor should have a “SWAN” account—for “sleep well at night.”|

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It’s a fool’s errand to try and explain daily gyrations in equity markets. The ride since the S&P 500 hit an all-time high just a few weeks ago has been dramatic, and any further declines should surprise no one.

“How many things were articles of faith to us yesterday, which are fables to us today?” Montaigne

Moving past more jawboning about the totally unprecedented shutdown of economic activity, the way forward is far from clear. The U.S. economy has been put into a forced coma in an effort to prevent further deterioration (which is not to make light of the terrible physical and emotional toll we see growing around us every day – it is simply a fact that I discuss investments here, not medicine – this analogy notwithstanding). It’s not certain that the government will be reviving its patient anytime soon. And it is possible that the restart will take far longer to achieve than we can imagine.

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I suppose we could be generous and suggest that the government has thrown a financial bone (a few trillion dollars) to small businesses and their now unemployed minions. And despite some seeming confusion, it looks like the banks and really big businesses stand to make out pretty good too, again. Yet by implying (promises don’t exist in the House, Senate or Oval Office) that the Fed “will do whatever it takes” for the next couple of months we are being warned the worst may yet be to come.

So how do we save and invest now? Wall Street-ers will tell you that this, too, shall pass. Probably, maybe, or maybe not. Better to wait until the fog clears, or start buying equities now because the first bounce off of the bottom is where most of the gains will come as markets recover? Personally, I’m making assumptions that have led me to use this last updraft to sell some ETFs and build cash for when the time comes to get serious about buying again. I’ll be on the sidelines for a while yet.

“Don’t trust a brilliant idea unless it survives the hangover.” Jimmy Breslin

Two examples are shared here:

First, my enthusiasm for emerging markets has completely evaporated.

Considering the impact of COVID-19 on the United States and our uneven responses, the idea that countries like India (three times the size of the U.S. population with a fraction of the medical infrastructure) will not see economic chaos is unthinkable. The Pacific Rim (and even Russia) haven’t begun to be hurt like the U.S. but almost certainly will. My bet is that supply chains get shorter as the world acts more local than global. After a couple of decades, I’m finally eliminating this asset class from my portfolios. When the time is right, the proceeds will be reinvested into non-U.S. blue-chip companies.

Second, publicly-traded REITs and real estate tied to equity markets will likely struggle mightily over the medium term.

Known for their great yields and high payouts (in the case of Real Estate Investment Trusts, required by law to distribute the majority of earnings to shareholders) it will be tough to pay dividends when companies and people don’t have to pay rent. How many restaurants, nail and hair salons or tattoo parlors will still be needing retail space six months from now? And what are the long-term ramifications of businesses learning that much of what needs to happen to ensure happy customers does not have to happen in centralized locations? Physical real estate makes up the largest part of my investable assets (all of which I’ll note are debt-free) so it no longer makes sense to have real estate exposure through equity markets. These funds will be reinvested in my S&P 500 ETF.

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Yet the most important takeaway might just be that cash is still king and liquidity matters more than ever. The focus today isn’t about making money, but preserving it. You don’t want to be forced into making decisions about your equity investments because one or another financial obligations have come due.

During the last financial crisis, a manager at UBS commented that every investor should have a “SWAN” account—for “sleep well at night.” Agreed.

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By the Book

|The investment books most likely to improve one’s abilities to invest successfully will not be the ones providing recommendations of what stocks to buy, and right now. Most valuable are books providing information to help guide intelligent decision-making.|

The investment books most likely to improve one’s abilities to invest successfully will not be the ones providing recommendations of what stocks to buy, and right now. Nor will a book simply offering models of fund-centric portfolios based on the age, temperament or any other attributes of their intended audience. Most valuable are books providing information to help guide intelligent decision-making. Though the classic works of Benjamin Graham and Philip Fisher are often recommended, their extreme technical orientation serves mostly to alienate less obsessive investors. Below are some suggestions for the less rabid, but no less enthusiastic investor looking to get smarter.

A great place to begin is Winning the Loser’s Game by Charles Ellis, originally published in 1985. It is far too easy to be blinded by success stories like those of Warren Buffett and Peter Lynch. The simple reality – clearly demonstrated by Ellis – is that few people (or mutual funds and their managers, or individual stocks) manage to consistently beat the market over time. His explanation of how people can appear to be great investors when in fact their success is due to statistical survivorship bias is eye-opening. Understanding the damage we inflict on ourselves through preventable mistakes, high-risk gambles and most significantly the fees we choose to pay as investors is vital if we want to be successful as investors. How could have taken over thirty years for this message to sink in?

A personal favorite from 2012 and one, it should be noted that several Invest-Notes readers have been less impressed with, is Antifragile by Naseem Taleb. This investment book is a refinement of his first work, Fooled by Randomness, published about twenty-five years ago. Taleb goes way beyond the idea of a “Black Swan Event” (a term he coined, and title of his best selling book, though not a favorite of mine) and discusses not only how to avoid unexpected events, but how to benefit from them when, not if they happen. As Taleb cleverly explains: experts aren’t; things that can’t happen will; and like physical exercise, stress can be harnessed for self-improvement. Don’t let his arrogance distract you from the invaluable insights being offered. Taleb’s most recent book, Skin in the Game, published earlier this year is also terrific – but more valuable if read after Antifragile.

Another good primer is the original edition of The Millionaire Next Door published in 1996. That some of the book’s conclusions have been shown to be faulty does not take away from the value Millionaire can offer would-be Warren Buffett’s. Short of winning a lottery (and that includes the genetic lottery), fortunes are most likely to be built over time, through luck, hard work, and patience. The many stories discussed in Millionaire provide practical examples of how to make the most of our current situation. This includes the single best thing anyone hoping to accumulate significant assets can do: Live beneath your means. It also helps explain why on lists of the wealthiest Americans over three-quarters are self-made, having created a fortune rather than inheriting one. Yes, you can be the millionaire next door, just not right away.

While The Essays of Warren Buffett is on many lists (and is on my bookshelf), there is another text providing a more insightful overview of how great investors operate. This book from 2000 also demonstrates beyond any doubt that there is no one single path leading to success. Money Masters of Our Time, by John Train, provides provocative insights into the thinking of seventeen of the most successful investors of the 20th century. It is here you will see that Buffett’s earliest successes came with risk most of us would never consider and that he has never repeated. Also worth noting is that several of these investors, among them some of the richest people on the planet, don’t use their wealth as anything but a scorecard. If there was ever proof demanded that having all the money doesn’t necessarily equate to happiness, this book is it.

Finally, More Money Than God by Sebastian Mallaby can do more to explain hedge funds, what they do, and how they work than other investment books you can read. The U.S. financial system, and the Wall Street crowd, in particular, have never met a good idea that couldn’t be abused and corrupted. Read in tandem with Money Managers, the world of investing will look very different when you’re done. The origins of these curious investment vehicles (and the people who created them) are fascinating, with many of the concepts still applicable, even for the individual investors reading this note.

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Who Are You?

|“All card playing is not gambling, all stock purchases are not investing…”|

– Jim Paul, What I Learned Losing a Million Dollars

What the heck is an investment plan? Open a brokerage account or interview a financial planner and you get handed a questionnaire intended to help determine what kind of investor you are – or will be, as a new client. But how do you answer a question like “Rate your tolerance for risk on a scale of 1-to-5?” A person willing to blow $1000 at the blackjack table while on a vacation in Las Vegas could be appalled at losing that same $1000 on a stock purchase. The glib advice – embarrassingly repeated at Invest-Notes on occasion – that everyone should have “An Investment Plan” isn’t really much help.

Investors must know themselves

Creating an investment plan is not complicated, but it does involve some critical thinking. First, acknowledge we have no control whatsoever over the movement of investments like equities, real estate or gold. There is no way to know if a stock is going to go up, and if it does, how high it can go. On the other hand, how much money you are willing to lose is entirely up to you. In essence, your investment plan is simply a set of rules to ensure that you never lose more money than you can afford.

As an investor, you can tell yourself that the stock you just bought is going to double in price, but that’s just a guess. Deciding that you are not going to lose more than, let’s just say 20%, while waiting to see if your guess is correct is the purpose of a plan. Conversely, suppose you are right and the stock does go up 100%. A decision made in advance to sell the stock anytime it drops more than 20% as the price goes up ensures you turn some of those paper profits into real ones. Prudent investors manage risk by making sure they never let emotions influence their decision making.

Second, you have to decide who you are every single time you make a transaction involving invested capital. You will not always be the same person, and if you become someone new in the middle of an investment episode your odds of failure grow exponentially. Along with a decision on what you are willing to spend in pursuit of a gain, you need to consider who you are. In the final analysis, it’s deciding in advance whether a piece of real estate, a stock, or a poker game (there are successful professionals in this field) is an investment, speculation or a gamble.

Are you an Investor, a Speculator, or a Gambler?

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Time for a Change

Invest-Notes continues to forcefully urge that individual investors anchor their investment and retirement portfolios around exchange-traded funds (ETFs). Specifically, indexed funds of the S&P 500 and international blue-chip stocks. Around this central component, it might make sense to add specialty funds, like those comprised of medical companies (for growth) or utilities (for yield). For the truly adventurous, and being mindful of the risks involved, having a handful of individual stocks can also make sense.

Individual stocks of major companies will find that on September 30, 2018, the description of what business they are in will change. This is not as odd as it might sound. Netflix started as a business to rent DVDs by mail. Disney made cartoons. AT&T was the phone company. Today Netflix has something like 125 million subscribers to a streaming video service that not only offers the same movies they used to rent but creates more custom content than the three TV networks combined. Disney now owns theme parks and ESPN. AT&T just bought Time Warner, go figure. As businesses evolve, so should the way in which we invest in them.

During the formative years of Invest-Notes, there was often discussion of specific trades. After the market mayhem of 2008-2009, not so much so. The shift in focus went from what to trade, to how to trade. This idea of talking about ways to make smart investments by thinking about our behavior will continue, but right now we’re going back to being very prescriptive about a specific investment idea.

New kid on the block

There is about to be a brand-new industry sector that will be composed of big companies coming from other sector funds. This matters, because the Big Daddies of indices, S&P Dow Jones and MSCI, use the GICS stock classifications to determine things like whether Home Depot should be identified as a Consumer Staple, or a Consumer Discretionary stock. In their turn, the Big Daddies of exchange-traded funds, like State Street and Vanguard, use these sector definitions of the S&P 500 and MSCI to decide what stocks will be included in the ETFs that individual investors are buying in ever-increasing amounts.

As a quick reminder, the Global Industry Classification Standard (GICS), is a worldwide standard for stock classification. Established in 1999 with ten sectors, the GICS started with: Consumer Discretionary; Consumer Staples; Energy; Financials; Health Care; Industrials; Technology; Materials; Telecom; and, Utilities.

ETFs-2017 GISC sp-500 sector weight — source: https://us.spindices.com/

The only change to this line-up occurred in August of 2016 when the Financial sector was bifurcated to create a Real Estate sector. Discussed here at that time in our article, “The Difference Between Banks and Buildings“, it should be noted that while Invest-Notes correctly identified the pros and cons of the change, we totally whiffed on guessing the subsequent performance of the two sector funds.

The transition taking place on September 30, 2018, is more impactful since it will see three sectors facing major changes to their composition. First, Telecom Services will be renamed Communications Services. Currently, the smallest of the eleven GICS sectors composed of only the stocks in the S&P 500, when Telecom becomes Communications it will grow from 2% of the index to around 10%. The challenge for investors is determining what to do with current sector holdings when some of the biggest stocks in the S&P get shuffled around. Google, Verizon, and Disney are not niche investments. In point of fact, the top holdings in the soon to be Communications Services sector comprise about 10% of the S&P 500.

Now, what happens to the Information Technology Sector when Google, Facebook, and other heavy hitters are no longer part of Technology ETFs and become components in the new Communication Services Sector? Or the Consumer Discretionary Sector (a sizable ETF holding in my personal accounts), where Netflix, Disney, and other big companies will be moving out. And is it a good bet to add one of the big Telecom ETFs – IYZ or VOX – in advance of the reshuffle?

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The Value in Art

|”Those looking at art purely as an investment might first consider looking elsewhere.” -Melanie Gerlis|

The last line in a thoughtful book by Melanie Gerlis, Art as an Investment?, does not do her work justice, “Those looking at art purely as an investment might first consider looking elsewhere.” In fact, she makes a cautious case for those interested in fine art who also have an interest in investing. But first, full disclosure since I am biased. Both fine art and antiquities constitute a meaningful portion of my investment portfolio. As I write this note, works by Max Beckmann, Chuck Close and Sol Lewitt surround me. A visit to the San Antonio Museum of Art will find a dozen Egyptian antiquities from our collection on display.

Another quote to provide some context for the following conversation comes from another great read, The Value of Art by Michael Findlay, “A collector has one of three motives for collecting; a genuine love of art, the investment possibilities, or its social promise” (quote by Emily Hall Tremaine). Anyone not meeting all three criteria is unlikely to enjoy the rest of this note.

Gerlis undertakes a laudable enterprise by comparing artwork acquired for investment purposes with other asset classes. An editor for The Art Newspaper, she is a knowledgeable commentator on the business of art. Her book makes one-on-one comparisons of fine art to; equity markets, gold, wine, real estate, hedge funds and, intriguingly, luxury goods such as jewelry and watches. By defining each investment’s attributes – such as market transparency, liquidity, market makers, and valuation metrics – she creates a context useful in determining the differences between these investment options.

We’ll focus on the world of fine art starting from a time around 1850. However, a caveat is in order here since the art market is a complicated subject and rather than try to qualify remarks that obviously have exceptions (most of them), let’s just assume that all comments below are, “generally speaking.”

The quick and the dead in art.

Following Gerlis, it seems appropriate to use metaphors taken from the world of investing herein. Conceptually there are two distinct markets with an important overlap. On the one hand are dead artists, the majority of which have some standing in the cannons of art history and criticism. Then there are the living artists whose reputations will evolve for better and worse, as should their artistic output, over a lifetime. In between are the few long-living artists who have achieved accolades likely ensuring their place in history. This can be viewed similarly to that of value and momentum stocks, assuming a gray zone here as well.

Value artists would include names like Cezanne, Pollock, Warhol and, of course, Picasso. Like a big established multinational corporation, the price of the art will fluctuate over time, but there is an expectation of enduring intrinsic value. Both the equity and art markets experience good and bad times, but the trend over long periods is upwards. Categories having demonstrated value over time include Old Master and Impressionist works. The place of post-WW II abstract expressionists also appears to have been firmly established, with Pop Art probably not too far behind. However, much like gold, art tends to maintain value over time, also contributing to the value in art. Paintings, in particular, have a curious tangential value as insurance. During times of crisis, paintings can be quietly transported across borders, their value not being linked to any particular currency, unlike real estate or some equities.

Momentum artists, on the other hand, remain an unknown entity as far as their long-term valuations are concerned. A look at the dot-com stock era is a good context for thinking about contemporary art – where hopes and dreams intersect with savvy marketing to create the “next big thing.” Or not. As one professional dealer put it, the worry is whether a work of art is even worth displaying five years from now.

With the rise of mega-dealers like Gagosian and Zwirner, who make a lot more money than many of the artists they represent, the hype is an ever-present danger. We hear about the unknown artist who finds their work suddenly fetching high prices at auction, but not their peers watching prices drop in the same market space. The books listed at the end of this essay give many examples of just how far a new superstar can fall. And how fast. There is a difference between a fad and a trend. Fads come and go, often with little in the way of residue. Trends are indicative of long-term shifts in taste or behavior. People generally tend to “get” Impressionist paintings. Not so much with “video art.” With contemporary art, the winner can more often be the dealers rather than the artists.

Currently, there is much conversation – and sales activity – being defined by issues unrelated to the value in art. Contemporary art originating in the Middle East and Latin America are hot art commodities right now even if their shelf life is unclear. A decade ago contemporary Chinese art was a market darling, just as the Aboriginal art of Australia had been twenty years before that. On the cutting edge in trendy art markets like New York is work by the alternative lifestyle crowd who now enjoy accolades instead of opprobrium for being LGBTQ. There is also a geographic risk when discussing a “local” artist as these tend to more often be about the person instead of their art. So, what is the value in art?

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What is the definition of wealth?

The idea that being a part-time investor is going to bring you wealth and make you rich enough anytime soon to retire and enjoy the life of as a country squire, tending grapes at your chateau in France is delusional. Better to assume that your efforts as an individual investor will leave you in a position “down the road of life” to enjoy long stretches of time doing things you enjoy. Maybe even months or years pursuing interests for their own sake, regardless of whether you get paid or not. I’m a big fan of the notion we should be able to take time to pursue activities simply because we want to – without worrying about any financial ramifications. That’s the point of this blog, to help ensure you have the means to create and enjoy a full life.

|Ask yourself, is it the wealth, or what you can do with the money, that interests you most? I’m a big fan of the notion that we should be able to take time to enjoy ourselves without worrying about financial constraints; as money simply represents the potential of what can be achieved by spending it.|

The wealth of Croesus isn’t waiting for anyone diddling in the markets, or looking to make a fast buck off of gold or real estate. If you want to make the Big Money, then you had better be prepared to put the fun stuff on hold and get busy doing Big Work. Do you really believe that you can play competitively on the same court as any of the 491 players currently in the NBA? What this meant for an individual investor really hit home for me many years ago, after reading John Train’s book Money Masters of Our Times.

A collection of interviews with 17 of the best investors alive, including the usual suspects like Buffett and Soros, the relentless drive, and focus of these individuals is breathtaking. And their idea of fun is to be relentlessly driven to focus on wealth accumulation. When one of the billionaires Train interviewed is asked about his very pedestrian lifestyle he replied that money was the scorecard. If he actually spent money, his score would go down. Ask yourself the tough question; is it the money, or what you can do with the money, that interests you?

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Market Drops

After an explosive move up in January, we were subsequently reminded that stocks (and indexes) can still go down. This is a time when it is especially important to avoid emotional reactions and focus on intelligent decision-making. Here are a few investment thoughts, offered up once before, that might be worth considering.

Simplify

1. Don’t make more predictions than your data can support. A collection of just four or five exchange-traded funds (ETF) is all most people need for a successful retirement account. If you own individual equities then understand the basics: what does the company do, how does it make money from that and what does it do with the profits? Beyond this, short of being a member of the company’s management team, there’s not much else you can know for sure. Assume nothing and avoid the temptation to believe a business is holding a winning lottery ticket. As Warren Buffett once noted, “You should invest in a business that even a fool can run, because someday a fool will.”

Focus on the not-too-distant future

2. Near-term forecasts are more certain than 10-year projections. Remember all of the investment analysts who were predicting a big drop in February with an immediate rebound? Me neither. The future has always been hard to predict and this fact is unlikely to change just because investors wish it would. Always be suspicious of undue emphasis on the long-term, especially when the short-term isn’t looking so good.

Understand your assumptions

3. Be aware of the weakest links in your argument. Without doing this, it is pretty much impossible to know when it is time to exit an investment position. When a key assumption changes, or more likely proves incorrect, it may be best to exit the investment and move on to the next good idea. Put another way, keep a lookout for what you didn’t think about when entering an investment.

Be wary of precision

4. It is better to be vaguely right than precisely wrong. Too much detail gives a false sense of security. This explains why successful panhandlers always ask for an exact handout, like sixty-three cents. It’s just human nature to think someone predicting that earnings for the S&P in 2012 will be $107.63 must know more than someone who simply suggests that earnings will be less than $100. Yet a prediction of a range – less than $100 – can prove more helpful in understanding the underlying assumptions, such that the S&P will struggle to achieve growing earnings.

Leave yourself an intellectual paper trail

5. By definition, our memories are terribly biased. During my 13-month experiment as a day trader (using a Scottrade account specifically for this purpose), I kept a spreadsheet documenting every trade, the cost to trade and the profit or loss on every position. While I ended up with about an 8% return (this was way back in 2007, when it was pretty hard to lose money in the markets), the amount of work involved as well as some of the risks assumed, made it obvious that market timing isn’t a good strategy. Being able to revisit the actual data has been a valuable reminder for staying focused on what works for me. I keep remembering how wildly successful I was, a notion difficult to reconcile with the actual data.

More Invest-Notes

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Coin of the Realm

That Bitcoin and its ilk are experiencing a “Netscape Moment” should serve as a cautionary note on many levels to investors. The practical similarities between the web browser Netscape Navigator as an investment, and Bitcoin as an investment are obvious. Netscape made using the World Wide Web practical for the average computer user. Bitcoin is the first application to make blockchain technology accessible for the average computer user. But with technology stocks, it does not usually payoff to be the first person at the party. So, it should come as no surprise if the “Bitcoin Moment” ends badly.

How the web was like blockchain

The World Wide Web was for much of its early years an intriguing idea without any widespread application beyond the military and academia. It took the creation of a universal access tool, initially Netscape Navigator, to make a sprawling, but difficult to access network something everyone could find a use for. Navigator made it possible for anyone to get aboard what is now called the Internet and communicate (email), connect (Facebook), share information (Google) and offer a platform for commerce (Amazon).

Long story short: Navigator launched in late 1994 with an IPO in late 1995 being one of the most successful ever, up to that time. Additionally, Netscape set what many investors would still consider a bad precedent by also being unprofitable when it went public. Long story short, by 1997 Microsoft’s Internet Explorer was the hand’s down winner in the so-called “browser wars” and Netscape never recovered. In 1998 AOL acquired Netscape. Its fate was the canary in the dot.com coal mine.

For our conversation today, let’s sum up the browser analogy this way. When Netscape opened up access to the Internet, few people were thinking about e-commerce or online bullying. The evolution of the Internet browser was trial-and-error in its purest form. Where blockchain ultimately ends up taking us remains unknown and we are still very early on a long journey.

So, what’s up with the futures exchanges?

What grabbed my attention was the announcement of the two Chicago options exchanges now offering futures contracts on Bitcoin. And there is some irony to the fact the contracts can only be bought and sold using dollars – you can’t actually short your Bitcoin collection, just gamble on its price variations. Yet the speed with which the options exchanges embraced the blockchain left me baffled until reading about a couple of projects MIT is working on in collaboration with two very different consortiums. Herein might be the next phase of blockchain implementation with the potential for serious impact on the global financial system.

One powerful application of blockchain is to create a viable currency to be shared among fringe economies. Think of Eastern bloc countries like Bulgaria, Romania, Albania, and Hungary creating a shared currency for use on par with the Euro and Ruble. Or of the many marginal countries in central Africa, also challenged by failed economies. In theory, the open nature of blockchain ledgers would make it possible for everyone – both inside and outside of the currency network – to see when a government is, for lack of a better term, cheating the system and exclude just their blocks from commercial use. Here, the transparency of an open ledger creates value and stability, making allies of adversaries.

Another interesting idea is using blockchain to create a cryptocurrency tied to physical commodities like gold, oil, sugar or wheat. This would eliminate the necessity of having to price commodities in dollars, Euros or rubles, reducing the amount of friction and cost in transactions by moving toward a true barter system. For international trade, this would be a huge shift in the balance of power away from the major currencies. To my mind, this scenario provides a perfect explanation for the rush to embrace blockchain by the futures exchanges.

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Oh Time, Thy Pyramids

Let’s start with a reminder that equities and fixed income instruments don’t respect the Gregorian calendar. Why should it? At what point does the fact that a year consists of about 356 days, and further divided into twelve months of more or less 30 days each, be considered a reason for selling stocks? This is not a concept of particular interest to Mr. Market. It is also a concept that should remain off the radar of investors, especially those with retirement accounts.

A brief history of time for investors

Egyptian Calendar

Conceptually, we call the time it takes for the earth to complete a full rotation on its axis a “Day.” The time it takes for the earth to complete a full rotation around the sun is called a “Year” during which period almost 365 days occur. The actual starting point of this cycle began around four billion years ago and as such remains a bit of a mystery. That this idea of a year being divided into twelve-month segments that have some kind of significance can be blamed squarely on ancient Egypt. Not only were the Egyptians responsible for the calendar as we understand it, they also suggested a start and finish to the year for help with planning around the annual flooding of the Nile. But they also invented tax collection, another questionable practice (as a side note, they also invented beer as we know it, and I’ve long been suspicious there’s a connection between this simultaneous appearance of beer and taxes). Today, as a recent article in National Geographic demonstrated, religion can also play a role in setting the start and finish of a year; March for Hindus, September for Jews and Muslims.

To tax, or not to tax

In tax-deferred and retirement accounts, no changes should be made just because the calendar says it is December. Or March, or September. Long-term investments are as oblivious to a twelve-month calendar as Mr. Market. As for investment transactions made in taxable accounts, there might be reasons for things like selling stocks to “harvest tax losses” but this often has the feel of market timing. Yes, you can sell a stock for a loss on December 30 and use that credit to avoid paying some taxes on profitable equity trades you’ve made. But why would you sell a stock with long-term potential for a short-term benefit? And if it was a crummy investment, why wait until year-end to sell? Unlike the Ancient Egyptians, you can “tax harvest” at any time.

“Inter Gravissimas”

So please don’t make a bunch of trades in your IRA or 401K retirement accounts because it’s the holiday season. Or because of decisions made by an Italian pope named Gregory in 1582 that subsequently provided the U.S. Internal Revenue Service with a framework for how to start taxing incomes to pay for the U.S. Civil War. Of course, we all know that taxing incomes in 1862 was just a temporary action initiated by Congress that couldn’t possibly endure since so many citizens were opposed to the idea.

What about stock markets next year?

Now, having said all of the above, let’s ruminate on S&P 500 returns for the year that was, and the year ahead. Knowing now that an artifice like the Gregorian calendar doesn’t have any relevance you can confidently declare a better reason for all those December sales of stocks in your retirement account. Everyone knows that after a big year like 2017 – likely to finish the year up around 20% – the next year will likely be not so good. This could be an unfortunate assumption.

As clearly demonstrated by the Boys at Bespoke (highly recommended), the performance of equity markets over time has about the same predictable correlation as flipping a coin; none. In fact, comparing index performance year-over-year is falling victim to the same bias; that Mr. Market has an internal clock and a memory. Comparing 12-month results from December to December will vary dramatically from comparing results from August to August. The S&P 500 had a very good year in 2016, up almost 12%, with most of the gains coming in the 4^th quarter. Certainly, a signal to sell going into 2017, right?

As for next year, well, if you’ve built a well-diversified portfolio of indexed funds anchored around a core holding like the S&P 500, your returns are likely to benefit from the fact that markets tend to rise more than they fall. In the final analysis, it’s about building wealth over time, not market timing to get rich quick.