Streetwise for Friday, December 25, 2020

The rather extreme volatility that has been an integral part of the markets over the past year has brought forth a series of questions, such as do you continue to hold stocks despite what you hope is a temporary reduction of unrealized gains?

Or do you take your reduced profits and maybe invest companies that are lagging the market. Or sell and remain in cash because you believe the market retrenchment will continue. One key factor is not to lose sight of Uncle Sam. Gains on non-tax deferred accounts are subject to being taxed as soon as you sell. The Uncle does not care whether the market is up or down.

There are no single pat answers although I certainly would refrain from throwing in the towel, thereby converting unrealized gains into taxable profits, and enabling Uncle to immediately lay claim to his share.

From my perspective, there is a reasonable probability that the markets will continue its upward climb in 2021, (with an occasional minor correction or two along the way). If that occurs and you continue to remain on the sidelines, you will be asking yourself why; why you did not take advantage of Wall Street when investments were on sale.

Security prices go through cycles of strength and weakness and the fluctuations may or may not coincide with various economic or market trends. To be a proficient at investing, you need to always be aware of companies whose share prices are facing temporary difficulties resulting from exogenous events that are beyond a company’s control.

While the actions by the Fed in 2020 were substantial to combat COVID-19, that stance will likely continue through 2021. However, we need to consider what the Fed’s position might be if the COVID-19 risk is ameliorated and inflation begins to resurface.

However, before you become to enamored with any projection of the future, consider a few details of the track record of stock market forecasters over the last year, as compiled by Bloomberg.

In December 2019, the median consensus on Wall Street was that the S&P 500 would rise 2.7 percent in the 2020 calendar year. The S&P 500 index is currently up about 13% year-to-date. That is a forecasting error of more than 10%.

However, there are still some basic truths on Wall Street that will continue well into the future.

Benjamin Graham, legendary investor, and author extolled the virtues of a simple portfolio policy...the purchase of high-grade bonds plus a diversified list of leading common stocks. A policy that most anyone could carry out with little difficulty.

Unfortunately, today’s environment could bring into question the bond portion of that statement, due to both low interest rates and minimal inflation and the possibility that the latter part of 2021 could see a reversal of both trends. The former will mean declining bond prices and the latter a reduced real (after inflation) return.

Those who study Graham will come to realize that the art of investing has an unappreciated characteristic of producing a creditable but unspectacular return, while requiring only minimum effort and capability.

To improve upon this easily attainable return requires substantial effort and more than a trace of wisdom. Bringing a little extra knowledge and cleverness to bear upon your investment decisions is unlikely to produce the expected increase in performance.

No, financial prophets do not exist. No one is going to lead you to the land of safety and high returns. You must find your own way and there are no sure and easy paths to financial success.

Yet, all too often people tell me how they were unable to resist the temptation to act because of what they heard at some free lunch or dinner, or on television, or read in the news media.

As we look towards the start of 2021, I would like to take a moment to wish all my readers a safe and prosperous New Year.

Lauren Rudd is a Financial Advisor with Raymond James & Associates, Inc., member New York Stock Exchange/SIPC, located at 1950 Ringling Blvd #401 Sarasota, FL 34236. You can contact him at 941-706- 3449. This market commentary is provided for information purposes only. The information provided is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Any opinions are those of the author and not necessarily those of Raymond James. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Past performance does not guarantee future results.

The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor's results will vary. Bond prices and yields are subject to change based upon market conditions and availability. There is an inverse relationship between interest rate movements and fixed income prices. Diversification and asset allocation do not ensure a profit or protect against a loss.