Processing Investment Advice, Predictions, and Risks

How seriously do you take market voices? By that, I mean advice, predictions, and risks not always grounded in common sense? This newsletter explores this conundrum.

Processing Investment Advice, Predictions, and Risks
“- Ah yes, those comets, they always predict great misfortunes. It doesn’t surprise me at all that poor Madame Galuchet suddenly died last night,” plate 573 from Actualités, October 30, 1858; Artist: Honoré Victorin Daumier – French, 1808-1879

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Market Commentators Have No Accountability for Advice, Predictions and Risks

Realize that there’s an important disconnect between the “advice”, “predictions” and “risks” people hear from market commentators and actual tactical moves an investor should make.  Most market voices have no accountability, publish no track record, and are not responsible for their recommendations to clients with real-life portfolios to manage

Example: September is a bad month for stocks

For example, you may have heard the very popular observation made in August that September tends to be a poor month for stocks.  While I heard this mentioned often, I didn’t hear actual recommendations on what to do. 

Let’s look at the month of September. 

According to Birinyi Associates, since 1945, on average, the S&P500 has declined 0.56% and yes, September is the worst month. So what does an investor do with this information? 

Should You Sell All of Your Stock Holdings?

Does it pay to sell all of one’s holdings to avoid a possible -0.56%? 

Selling doesn’t seem to make sense, especially when considering taxes and transaction costs.  Now, -0.56% is an average. 

Looking back 10 years, the S&P500 was down in 5 years and up in 5 years. The most the index was down in a year over the past 10 was 7% and the most it was up was 3%. 

Again, it is hard to make the case to bail out. 

Should Investors Be All In or All Out?

Pundits also make it seem that investors should be all in or all out. They come with dire predictions and no probabilities associated with the possible outcomes. 

At any given time there could be a 50% decline in the markets but what is the probability of that happening? 

“Be wary of the man who urges an action in which he himself incurs no risk.”

Lucius Annaeus Seneca

Focus on What’s Important and Actionable. Ignore Noisy Advice and Predictions

In the markets, there is a lot of noise. Investors need to focus on what is important and actionable and ignore what seems to be shaky correlations or axioms.  Investors should follow their financial plans, make sure they have a robust decision-making process, and rebalance accordingly. 

Which Companies Can Pass on Cost Increases?

Now that September is behind us, it’s earnings season and investors will get a look at actual consumer demand and the impact of higher input costs.  It will be important to note which companies are able to pass on cost increases.  This can provide insight to companies that have durable business models. 

Increased Earnings Estimates Lead to Disappointments

Analysts have been increasing earnings estimates heading into the end of the 3rd quarter.  This makes it more difficult for firms to beat their estimates. Disappointments are sure to happen. 

You’ll always find some corporations that fail to make or beat estimates.  Much will be made of these companies in the financial media but be careful not to draw conclusions about the broader market

This earnings season will likely be very company-specific.

Have You Considered Preferred Stock?

Preferred stock is an asset class that is often overlooked by investors. 

Characteristics of Both Stocks & Bonds

Preferreds have characteristics of both stocks and bonds and do not fit easily into either category. Utilities, banks, and REITs are the main issuers of preferred stock. 

Carries a Fixed Dividend

Preferred stock is a form of equity that typically carries a fixed dividend and no voting rights.  They are senior to common stock but junior to bonds so in a bankruptcy, bonds get paid first. 

Often Have a Call Feature

Preferreds often have a call feature.  This means that one has to be careful not to pay a premium above the call price if the issue is likely to be called.  Calling a preferred could result in the investor receiving a negative yield. 

No Maturity Date

Another notable feature of preferred stock is that the security usually has no maturity date.  Perpetual securities are highly sensitive to changes in interest rates. 

Consult Your Investment Advisor!

It is important to understand the features and risks involved with any investment.  Preferred stock is no exception.  In the current investment environment, there could be solid reasons to include preferreds in a portfolio.  It is important to consult your professional investment advisor to make sure they are suitable for you. 

Total Return May Be Better Than Bonds

With interest rates low and likely to rise, call risk is reduced.  Today, many preferred stock issues pay significantly higher yields when compared to bonds.  Even when factoring in potential declines in value due to rising rates, the total return on certain preferreds may be better than bonds. 

Taxed at a Lower Rate Than Bond Interest Income

The economy is on a post-COVID upswing which lowers the risk of default as corporate cash flows should be sufficient to maintain preferred dividends.  Depending on the issue, preferred dividends are considered “qualified” and taxed at a lower rate than interest income on bonds.

Possibly an Attractive Addition to Income Portfolios

Preferred are not bond substitutes but they may be an attractive addition to income portfolios. 

When adding to a portfolio, often it is advisable to buy in slowly or leave enough room in the allocation to add later if prices become more favorable.  If rates rise and preferreds have a move lower, they could be even better buys as long as the economy remains strong.   

How Will You Now Process Investment Advice, Predictions, and Risks? 

Given the noisiness in the markets, do you feel more confident about staying focused on what is important and actionable, and ignoring what seems to be shaky correlations or axioms?

I can’t repeat this often enough:

Investors should follow their financial plans, make sure they have a robust decision-making process, and rebalance accordingly. 

You should, too.

And if you haven’t already, consider revisiting 9 Financial Resolutions for the New Year. It’s relevant regardless of the time of year and makes the case for creating a financial plan – among other priorities.

Thanks for reading.

Click to Download the October 2021 Newsletter

Note: This blog article is intended for general informational purposes only. Nothing in it should be construed as, and may not be used in connection with, an offer to sell, or a solicitation of an offer to buy or hold, an interest in any security or investment product.