Every year I like to do a recap of the lessons I learned over the preceding twelve months. I find this exercise to be cathartic in examining past mistakes as well as reminding myself of successful portfolio management guidelines that will serve us well in the future. Many of these lessons also apply to other areas of my life outside of the financial markets as well.
Part of this practice also involves reviewing my prior years’ lessons in order to stay mindful of the journey that has brought us to this point. So let’s dive in to the high level topics that drove the markets and our portfolios this year…
1. Trendless markets require endless patience.
Looked at a chart of the SPDR S&P 500 ETF (SPY) lately? It’s gone virtually nowhere over the last 12-months. However, that doesn’t mean it has been completely asleep. There have been gut-wrenching drops and face ripping rallies that virtually no one could have foreseen ahead of time.
To add to this sense of frustration is the fact that returns in bonds and cash are virtually flat as well. A 50/50 diversified portfolio of stocks and bonds is likely sitting near the zero line in 2015.
It’s years like this that truly test your patience with sticking to your plan versus trying to go find a better system or advisor that rose to the top. Of course, you have to ask yourself whether any supposed alpha this year was driven by a time-tested process or the result of simply stumbling into the right place at the right time. Be mindful of taking on too much risk by chasing performance in areas of the market that appear stretched or are outside your comfort zone.
2. Just because an investment seems cheap, doesn’t mean it can’t get cheaper.
Anyone who has been trying to find a bottom in commodities or energy stocks this year certainly can relate to this axiom. There have been plenty of pundits, pivots, and pirates in this group that have been unable to successfully navigate the deflation trade.