For as long as I’ve worked in this industry I have shied away from predictions on year-end targets for market indexes.  This is not to imply that I don’t have beliefs about the direction in which the market will go (hint: given a longer time frame, always up) but in terms of applying a magic number at which a given index will close on December 31^st, well, it’s never been a practice of mine, and if asked, I will always deflect by changing the subject, or faking an injury, or pulling the fire alarm. (I don’t pull the fire alarm as this is an indictable offence resulting in a charge of public mischief.  So don’t do it unless there’s actually a fire.)

It’s not that I don’t care about the market direction in any given year – it’s simply that how I prefer to invest depends more upon strategies that will, over time, produce desired results, rather than profiting from a prediction of shorter-term market action.

What are these strategies?  Glad you asked.

1. Own companies that pay you a dividend. A dividend provides more than just income – it can also indicate that a company’s balance sheet is in good shape. And when a company increases its dividend, it’s a good indicator that management has confidence both in its present and future prospects. Earning a stream of income from an investment provides some comfort and cushion in times when the market isn’t doing what you want it to do.
2. Reinvest that dividend. The power of compounding can really juice your return, over time. On a price appreciation basis, the S&P500 annualized return from 1926-2015 was 5.8%; however, when you add in compounding from dividend reinvestment, that return jumps to 10% - a 72% increase.
3. Stay invested. I can’t predict what an index is going to do in the shorter term (nor can anyone else) but I have seen enough research that tells me there is a huge difference in annualized returns if I’m not invested on those days when markets perform well. From January 1^st, 1999 to December 31^st, 2018, if you weren’t invested during the top 10 best days in the stock market, your overall return was cut in half. And if you missed the top 20 days, your annualized performance drops below zero. Owning a diversified set of companies that pay you a dividend coupled with an identifiable discipline of risk management that will produce decent results over time. And, finally,
4. If you are sure the market’s going to do something in particular during a specific time, forget it. Like the tweet quoted at the top of this article, it’s the stuff we don’t see coming that usually throws a wrench into the plans. Events, headlines, and sentiment can cause volatility to spike and lead to the downward pressure, but in the end, it’s fundamental factors such as company earnings and profitability that ultimately drive prices higher in the long run.

You might notice that time plays a critical factor in earning a good investment return. It’s another reason why I don’t make yearly predictions, as mentioned in a previous barn burner of an article I wrote (you can find it here).  

As Pops used to say, “Patience pays, Sherilyn.” When I was 7 years old I used to think that meant he wouldn’t buy me the toy I absolutely needed to have, but now that I’m much older I know he had the dual purpose of (a)not buying me the toy I absolutely needed to have, and (b)distilling in me a disciplined investment philosophy to which I still subscribe so many years later.

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<sup>1. CFA Institute, 2017
2. JP Morgan Asset Management, 2019 Retirement Guide</sup>