Streetwise for Sunday, January 3, 2021

“...The world looks brand-new,” said Hobbes. “A New Year...a fresh clean start,” said Calvin. “It's like having a big white sheet of paper to draw on," said Hobbes. “A day full of possibilities,” said Calvin. “It's a magical world, Hobbes old buddy...let's go exploring.”

Bill Watterson wrote those words in December of 1995 as he concluded the last of his Calvin and Hobbes comic strips. Every year since then I open my first column of the New Year by quoting that phrase because the message is so abundantly clear. The financial markets are analogous to Calvin's magical world...full of possibilities. All that remains is for you to go exploring. 

Looking ahead, I believe the economy is poised to grow during the New Year. The key question of course is by how much and with degree of volatility. Ask me at the end of the first quarter and I might be able to hazard a guess, keeping in mind that it would encompass only a degree of probability as to what might happen going forward. 

Nonetheless, given market performance in 2020, many would like to see a replay in 2021. Unfortunately, do not believe that is in the cards.

Yes, while pursuing and expecting a reasonable return is within the realm of possibility through the utilization of a carefully selected equity portfolio, not everyone would agree. Sometime back I wrote that a survey of investors indicated that 77 percent of the individuals responding to the survey described themselves as cautious rather than aggressive. Translated, that likely mean that they would blanche at the idea of an all-equity portfolio.

Generalized surveys over the years have also shown that about 80 percent of investors choose safety over performance. This disengagement between expected returns and manageable risk can lead to emotional decisions and mistakes that can destroy a portfolio.

According to Bloomberg, a university study over two years utilizing more than 20,000 respondents, asked investors how they would respond if the market dropped 10 to 20 percent over a six-month period.

Only 18 percent said they would add to their equity investments, whereas 45 percent said they would sell off their stock holdings and 38 percent said they would do nothing. Buy when others are selling.

When asked about defining risk, 35 percent defined it as losing assets or wealth. 20 percent defined it as exposing assets to volatility. Eight percent defined it as missing out on an investment opportunity. Yet, the mathematical definition is the standard deviation of your returns away from their average return.

The key to your 2021 financial success will be in direct proportion to the effort you put towards the analytical analysis of future corporate revenues and earnings, while ignoring the kind of volatility we have seen during the past year.

While it is no guareantee of success, for many indivuduals investing in stocks has been and always will be the greatest wealth builder of all time. Yet, as we move into the New Year if you are apprehensive about what lies ahead, take heart. Over time common sense in combination with a modicum of patience, will often produce more than satisfactory annual investment gains.

Focus your attention away from the continual prognostications of what might happen and instead concentrate on how to best allocate your investment resources among individual companies. You can forecast a company’s performance; you cannot forecast the market’s performance.

You will be inundated with 2021 market forecasts of every description. Many will try to conjure up a primordial fear of Wall Street but offer salvation...for a price. Do not to fall sway to the passions of the market, the tenets of its prognosticators or those selling new improved versions of snake oil. Instead, consider the words of Wall Street legend Lucien Hooper.

"What always impresses me," he once wrote, "is how much better the relaxed, long-term owners of stock do. The relaxed investor is usually better informed and more understanding of essential values; he is more patient and less emotional."

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 and does not constitute a recommendation. Opinions are those of the author and not necessarily those of Raymond James. Information has been obtained from sources considered to be reliable, but Raymond James does not guarantee the 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.

Bloomberg survey data provided by Bloomberg Media Distribution.