Preparing for the New Investment Paradigm

One blogger—and money manager—recently deemed this “The Hardest Market Ever.”  If you’re able to see through his unique style of writing, you’ll find that he has a well-founded understanding for market dynamics.

When markets become erratic / irrational / inefficient / volatile, investors—both retail and institutional—search for explanation.  As the underlying fundamentals of a company do not change drastically from day-to-day, the search often results in technical analysis.  Technical analysis is, in part, a self-fulfilling exercise; and one that leads to revision as time passes.  Often, seeking an answer through technicals can prove erroneous and misguiding.

I’m going to suggest this is not the answer; I’m going to suggest it is something more encompassing.  While both fundamental and technical analysis have their place at 85 Broad St, equity markets have structurally changed.  No longer is the environment fit for the retail investor.  Retail investors, and most asset allocators, are at distinct disadvantages.

Strategies must adapt.  As an investor, you must be able to fluidly transition your portfolio between analysis types, investment styles, and timeframes.  For example, to state that buy-and-hold is dead is somewhat of a fallacy.  To associate a 10+ year timeframe with an investment is just not prudent management; perhaps it never was.  However, there will be investments that outperform even the best money managers over the course of the next 10 years.  Herein lies the dilemma.

Behavioral risk dominates most investment decisions.  The investments that generate the largest returns over the next decade are likely to have some of the most volatile price swings.  Do you have the tolerance for this volatility?  I think not.  Therefore, long term investments are not appropriate for you.  But it is questionable if you have to capacity to make objective and accurate decisions on a shorter time frame.  Whatever your goals are for your investments (e.g. college, retirement, etc), you must invest for both the journey and the destination.

So yes, I agree:  this market is hard.

Ryan Lampkin is the Chief Investment Strategist at Castle Asset Management.  Castle is an independent registered investment advisory firm whose focus is to transform the way clients view asset management.  Castle’s proactive approach has guided its clients through the paradigm shift of the investment management industry.

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