The past two years certainly provided investors and fund managers with a sufficient amount of news headlines that could move the equity markets to the downside. The debt ceiling debate in 2011 (now being repeated in 2013), the election, the fiscal cliff and budget sequestration (kicked to early March 2013.) During this time period individual and professional investors remained cautious on the equity markets. Bond investments have been favored over stocks as the mood was "risk off".
[Related -Automating Ourselves To Unemployment]
With the calendar turning to a new year what is the mood of investors? In a recently released survey of fund managers by BofA Merrill Lynch, they find,
"The new year sees asset allocators assigning more funds to equities than at any time since February 2011, while their confidence in the world's economic outlook has reached its most positive level since April 2010. Investors' appetite for risk in their portfolios is now at its highest in nine years..."
During this period from April 2010 through early 2013, when the appetite for risk was low, the equity markets found a way to generate strong returns for investors. As the below chart shows, the S&P 500 Index and the Dow Jones Industrial Average generated price returns of 27% and 25%, respectively.
During the first few weeks of 2013, the equity markets continue to move higher.
[Related -Fed: Waiting For June… Or Godot?]
Investor behavior biases have likely played a role in avoiding equities over the last few years while finding them attractive now. Investors are rightfully concerned about large losses as losses can do damage to ones retirement assets. Positive sentiment can also be attributed to the fact that last year the S&P 500 was positive for the entire year, i.e., it did not close in the red on a year to date basis on any single day, and so far in 2013 the streak continues. According to an article by Avondale Asset Management,
"While there was little mention of the S&P 500's perfectly positive year, the occurrence is actually pretty rare. Data for the S&P 500 since 1957 produced only three other years where the index started the year positive and never closed negative on a YTD basis during the year."
As the longer term market chart above shows, a sell in May strategy certainly did not work in 2012. Might this be a year this seasonal approach works? These type of allocation moves are tactical ones and there is a downside if one is wrong. Barry Ritholtz, Director of Equity Research at Fusion IQ, discusses some of his mea culpas in 2012 and one of them was some of his tactical calls.
At Dorsey Wright's Systematic Relative Strength blog he comments on a Time Magazine article that highlighted research that shows "the more hands Texas Hold'em poker players win, the more money they lose." Wright surmises "investors will often prefer a system with 65% winning trades over a system with 45% winning trades, even if the latter method results in much greater overall profits." The study author, Kyle Siler of Cornell University concludes, "People overweigh their frequent small gains vis-à-vis occasional large losses."
For investors then, removing emotion from one's decisions is important in order to attain returns that meet retirement goals and objectives. Developing an investment policy can be used as a beneficial road map to follow in times of difficult markets. Difficult markets are not only ones that are declining, but also, feeling left behind in strongly rising markets as well.