Hello traders
I hope you had a good week!
One of my favourite investing anecdotes is how the vast majority of returns are made due to "time in the market", rather than "timing the market".
With the Fed due to speak at Jackson Hole today, investors are anxiously waiting to see whether the U.S. central bank will begin dialling back their stimulus as many anticipate. Events of this magnitude tend to amplify investor anxiety to the point of cutting risk, and even making costly short-term decisions out of fear. If you are reading this and share similar feelings, then you are certainly not alone - even some professionals behave irrationally and exhibit loss aversion (we're all human, after all!).
Given the positive scores exhibited by our U.S. equities and business cycle Checklists alike, I am pretty sanguine in my longer-term outlook for stocks regardless of whether there is tapering, or not. Of course, I would rather the ‘helicopter money’ era to continue, but I acknowledge that taper-talk reflects the underlying strength of the economy. Here’s a reminder of the full marks seen in our business cycle Checklist…
…and also the positive score for stocks.
This potent combination has driven the S&P 500 to a new record high (at the time of writing), having risen from 4380 when the scores were updated at the beginning of the month (our next update for September will be available exclusively to Trading Club members next week).
Returning to the anxieties felt amongst other investors, the following chart from Bloomberg shows how risk aversion has cost nervous investors 29% since 2015, versus buy-and-hold. This assumes that traders closed their positions on the day before every Fed decision and jobs report, and then reopened it the following day (after they realised that the stock market wasn't going to zero!).
Whilst the Fed has been typically dovish during this period, it does reiterate the importance of remaining committed to your investment horizon (if that is indeed long-term, like mine) and not positioning short-term on the basis of speculation and sentiment - and worse still, loss aversion.
Whilst we of course cannot predict the future, I think this demonstrates just how costly emotionally-led trading decisions can be around major events. They say "Don't Fight the Fed", but perhaps we shouldn't "Fear the Fed", either.
To learn more about our methods, and join me for more analysis in real-time, check out our MDT course and Trading Club pages where you can preview everything that we cover.
In the meantime, why not head over to our YouTube Channel for our latest FREE videos which I will be bringing to you each week in 2021! As there’s no charge for this content, it would be great if you could support the channel by leaving a comment and subscribing.
Have a great weekend,
James
Disclaimer: For educational purposes only. Even though we do our best to provide reliable data, you should not trade based on this information.
© Copyright 2021 Lex van Dam Financial Education. Further distribution prohibited.
