As an investment adviser, I consider myself a student of the market. Every year the market teaches you new lessons that you can either absorb and learn from or ignore at your own risk. In fact, some of these lessons happen to be old favorites that can serve as a refresher of how the market can humble even the most ardent bull or bear. One thing is for certain, 2013 will go down as a year where the trend was your friend and fighting it only made things worse.
1. Don't fight the trend
The one adage that always seems to drive the most logical minds crazy is that "the market can remain irrational longer than you can remain solvent". This is especially true in 2013, when the market climbed a wall of worry that included Federal Reserve policy shifts, government budget impasses, fiscal cliff negotiations, and a host of other looming disasters. Through it all, stocks persevered and the SPDR S&P 500 ETF (NYSEARCA:SPY) is now knocking on the door of 30% gains in 2013.
The lesson that was reinforced was: do not fight the trend or get too predictive about the future of stocks. All you had to do was look at a chart and follow the 50- or 200-day moving average. Both of which confirmed the bull market was in place. At the end of the day, price is the ultimate arbiter of reality.
2. Taper is not the top
Speaking of forecasts, remember when tapering would be the death knell for stocks and interest rates would shoot to the moon? In fact, the opposite is true. In its most recent meeting, the Federal Reserve kept its commitment to honor improving economic statistics and decrease its current pace of bond purchases by $10 billion per month. That clarity helped boost stocks to new highs and gave us a road map for what additional policy changes may hold in the future.
In addition, interest rates remain largely unchanged from the days leading up to the Fed meeting, which leads me to believe that the threat of tapering was largely priced into the market. Another lesson to be learned is to not fight the Fed or become convinced that a specific outcome is a foregone certainty. Often times the market will surprise you.
3. There is always a bull market somewhere - even in bonds
Many have declared the bull market in bonds to be dead. Some have even suggested that we are in the throes of a great rotation from bonds to stocks that will drive interest rates considerably higher. They point to the double digit losses in the iShares 20+ Year Treasury Bond ETF (NYSEARCA:TLT) in 2013 as a proxy for the entire bond market. I assure you that it is not.
While treasuries have been under fire this year, I am not wholeheartedly abandoning bonds in my portfolio. Just look at the performance of the PIMCO 0-5 Year High Yield ETF (NYSEARCA:HYS) or the PowerShares Senior Loan Portfolio (NYSEARCA:BKLN) this year to see areas of strength. Even in the midst of a steep correction, investors flocked to credit and short duration holdings in an effort to maintain their income streams and insulate their portfolio from rising rates.
The lesson learned is that there are always pockets of value and opportunity that overcome the mainstream bias. Don't get overly bearish on a single asset class just because of recent underperformance or media headlines. Stay balanced and true to the trend.
4. Gold has lost its shine
Another asset class that has come under fire this year has been gold and precious metals stocks. As a result of shifting demand, production efficiencies, and other market dynamics, the SPDR Gold Shares ETF (NYSEARCA:GLD) has fallen almost as much as SPY has risen in 2013. According to Index Universe, this has led to unprecedented year-to-date outflows of over $24 billion in this ETF. In addition, the World Gold Council recently cited gold exchange-traded products as one of the most significant drivers of Q3 gold supply and demand trends.
Although gold is an indisputable store of value, this year has taught us that it is just as susceptible to downward price swings as any other hard or paper asset. In addition, ETFs are now becoming a very important player in worldwide commodity markets. Love it or hate it, ETFs are revolutionizing the way that we invest and can have an outsized pull on certain markets or securities.
5. Risk is a function of reality
Risk is something that we deal with in varying ways on a daily basis. When you are investing, risk is a function of the playing field and should be looked at as both a blessing and a curse. Without risk we would not be able to achieve double digit gains in stocks. Conversely, we would not be susceptible to double digit declines in commodities. The key to navigating risk is to have a game plan in place that allows for maximum upside potential with minimal drawdown.
Everyone sets out with the best intentions and yet sometimes investment themes fail to produce the envisioned results. That is why I have learned to always have a stop loss or sell discipline on every position in my clients' portfolios to help mitigate the risk of a substantial drawdown. Selling all or a portion of a position that goes against you will allow you to sleep better at night knowing that the bulk of your capital is intact and ready to be deployed to new investment opportunities when the timing is right.
6. Who you are is a function of the company you keep
This year I was forced to remove someone from my professional and personal life that was a consistent negative presence. Despite knowing this person my entire life, I found everything they espoused to be against my core beliefs - both on an investment and private level. This taught me a lot about surrounding myself with people that are a positive influence on my life and share the same fundamental ideas and values.
The community of professional investors, traders, and bloggers that I have surrounded myself with this year has profoundly altered my approach to investing. Together we have shared ideas, sought gains, protected emotional capital, and weathered the markets' unpredictable ways. The combination of Twitter, Stocktwits, and investment websites that I frequent have helped educate and provoke new dynamics that were not available just a few short years ago.
The Bottom Line
As an investor, I challenge you to continue your journey by writing down some of the things that you have learned in 2013. These bullets may serve you well in the months and years ahead as the conditions on the ground continue to shift.
At the end of the day, there is no perfect formula for investing. You have to pick a philosophy that works for you and stick with it through the good times and bad. As we make our way into 2014, I look forward to sharing my ideas along the way and learning new lessons on this journey together.
Disclaimer: David Fabian, FMD Capital Management, and/or its clients may hold positions in the ETFs and mutual funds mentioned above. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities.