Given the unconstrained nature of the equity market’s recent gains, I feel it is necessary to take a deep breath and reflect upon expectations, real and imagined. It is fairly obvious that “benchmarks” are critically important when evaluating market and portfolio performance, but they are not the only criteria by which that assessment can be made. Expectations, instead, must be reasonable, and consistent with appropriate market fundamentals. To achieve one’s desired result you need an abundant data set, and a wide aperture for comparison amongst various sector and cyclic phenomena.
Unfortunately, within the
current context of unbridled expectations, we are losing sight of what it means
to be opportunistic and what it means to manage risk.
In my practice, you would
assume that duration and tracking of certain benchmarks go hand in hand. Ideally one would be looking for as close a
correlation between the two as possible, and to arrive at a portfolio which is
totally driven by risk assessment and return opportunity.
That being said, the market
today, by its very nature, is creating a psychic de-coupling between return and
risk evaluation, and setting up a wider beta that challenges some investors to
stay patient. Without benefit of time and cycle analysis, many investors are jumping
on a train that has already left the station in an effort either to catch up
for lost time or not to fall too far behind their neighbors. This type of herd-mania can only increase the
stress level and uncertainty for those who have no discipline or long-term
plan.
Additionally, I am seeing some
investors casting so large a net that their portfolio becomes an amalgamation
of geographies, sectors, cap-weightings, and product offerings. As a starting point alone, that should raise
red flags about the prospect of portfolio performance.
Although some might claim that this “wide net” creates
diversification and opportunity, it looks to me more like an act of desperation
and unanticipated negative consequences.
Within the laws of prudent
portfolio management theories is the need to stay focused, disciplined, and
patient.
Too high?
So what is the market trying to tell us this early in the quarter? I believe that whether your confidence allows
you yet to commit fully to the market or not, the global financial bourses are trying to synchronize around longer term
fundamentals and earnings patterns, and looking to “re-systematize” the
approach to this equity selection process.
In other words, we are at a more
opportune time than any in the last half-decade to return to pricing and market
data which make for traditional valuation on a comparative basis within a
coordinated universe of common assumptions.
While short-term volatility is
always a trademark of this rebuilding process at the margins, we will
eventually return to somewhat better correlation of global information that
makes, by extension, broader market timing and asset selection more impactful
for the longer term.
Historically, when opportunity
lines up within a smaller ratio of beta and standard deviation, it may not
guarantee successful portfolio outcomes, but it does improve the predictability
of adding potential value to the portfolio.
Far less than we fear the sudden spurt of market gains this year, we
hope for a greater equilibrium to our psyche so that we neither fear, nor
chase, that train departing the station.
No comments:
Post a Comment