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Investing in a World of Uncertainty

It seems that a day (or sometimes hour) doesn’t go by without some new piece of potentially market-moving information or news coming out.  This is partially a reflection of the speed in which the news cycle operates these days with everyone now being a potential news source.  But even more, as the world and financial markets get more interconnected the impact of an event, speech, news report, data point, etc somewhere in the world has far-reaching implications and can impact markets throughout the globe.

The recent news is all about the impact of the Trump presidency. Tax policy changes, immigration reform, protectionism, tariffs, social unrest and cabinet appointments have all dominated the news cycle over the past month and should be potentially market moving variables. However, these are not the only uncertainties in the world. Even before the election, there were already questions about Brexit, OPEC, rate changes, terrorism, the Eurozone, refugees and China, just to name a few.

In the past any one of these variables could have moved the markets in one direction or the other but what we saw last summer and again this past month is this uncertainty leading to stagnation in the markets.  I touched upon this in my January market commentary (The Brave Report) as the market traded in one of the tightest ranges in history.  With all of these uncertainties in the market, no one wants to be on the wrong side of the next market move. The result is……nothing.  Unlike some other times in market history when any one of these variables would have caused a major pullback or pushed the market forward, we are seeing all the uncertainty cancel itself out and make it very difficult for investors and traders alike to find any directionality. My fear and the fear many investors are feeling is that the market is just storing up its energy so when a move in one direction does happen, it will be sharp and quick.  We saw an example of this following the election. Uncertainty had been building up throughout the summer and into the fall causing markets to trade in a tight range. Once we had certainty about the election, we saw a sharp move higher and could just as easily see a similar move in the other direction.

So with such a range bound markets and uncertainty in every direction we look, how should you invest?

Unfortunately, the answer isn’t sexy but during these times of such uncertainty, the best investment is a well-diversified portfolio. I know this sounds simple but when markets are range bound and lack directionality the prudent investor should be rebalancing to their optimal balanced asset allocation.  Attempting to time a market in this environment is a dangerous game to play because it is very difficult to predict what the final catalyst will be to move the markets in either direction.

Numerous studies have been done about the benefits of being fully invested for the best trading days or being out of the markets for the worst days.  Michael Batnick points out that since 1970 the market has gained an average of 6.7% annually. If you missed out on the best 25 days your annualized return would drop to just 3.4%. However, if you missed the 25 worst days your annual return would have been 11%.

This is quite a performance disparity in both cases but to be able to accurately predict these best and worst days is impossible. With that said if we do expect uncertainty to continue to rule the markets, you want to make sure your portfolio is positioned in a way to capture at least a portion of the upside if the market does break out higher.  You also want to make sure you limit your downside if the market pulls back significantly. The best way to do this is through a balanced asset allocation in line with your risk tolerance.

You can’t always predict the next market move but you can put yourself in a position to limit your risk during such uncertain times.  Waiting until markets are trading more on fundamentals and certainty before taking a real stance on the market’s direction is not a bad thing. Your outcome will not be quite as fruitful as if you were able to time the markets perfectly but if you have the ability to do that then you probably don’t need to be reading this article anyway.

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