(PUB) Investing 2016

702 / 708

12 • Fund Family Shareholder Association
“We’ve long felt that the only value
of stock forecasters is to make fortune
tellers look good. Even now, Charlie
and I continue to believe that short-
term market forecasts are poison and
should be kept locked up in a safe
place, away from children and also
from grown-ups who behave in the
market like children.”
—Warren Buffett
THE NEXT PRESIDENT, whether it’s
Clinton or Trump, will preside over a
bear market. That’s an expectation, not
a prediction.
Dictionary.com defines an expecta-
tion as the act or state of looking for-
ward. To make a prediction is to declare
or tell in advance; prophesy; foretell.
For investors, there’s a subtle but
important distinction between expec-
tations and predictions. Expectations
shape an investor’s mindset, establish-
ing a baseline or range of outcomes for
what might reasonably happen in the
future. Predictions are usually specific,
time-constrained forecasts that are gen-
erally issued with the understanding
that they will be acted upon, but whose
outcome may not be known until long
after you could reasonably do anything
about it.
Predictions or Expectations
Consider my opening statement—
the next president will preside over a
bear market. Why is that an expectation
and not a prediction? We would all
agree that this is within the realm of the
possible, particularly given the fact that
the current bull market is already in its
eighth year. It is an investment scenario
we should expect, or at least consider.
But I have not been specific as to the
catalyst for the next bear market, nor
the severity or length of the downturn. I
haven’t even been all that specific about
the timing—saying something will hap-
pen sometime in the next four years
isn’t all that helpful when it comes to
trying to trade around it.
Not to belabor the point, but if
you are still unclear on the difference
between expectations and predictions,
run a Google search on each word. All
of the top search hits for “expectation”
are websites offering various defini-
tions of the word, while many of the
tops sites under “prediction” are related
to betting on sports events. That seem-
ingly symbiotic relationship with gam-
bling should tell you something about
predictions.
Silly Season
With the Presidential election loom-
ing, gold at a recent high, stocks becom-
ing more volatile and, yes, the end of
the year upon us, the pundits and their
predictions are revving up.
Making wild predictions, whether
it’s about politics, the weather or the
investment markets, will get you clicks
or three minutes of fame on TV, but it
rarely provides meaningful or useful
advice. So beware.
On the other hand, setting expecta-
tions isn’t as flashy as making bold pre-
dictions, but approaching the markets
and building your portfolio based on
reasonable and rational expectations is
an often-overlooked key to investment
success.
In short, expectations are about pre-
paring for different outcomes, while a
prediction is an attempt at guessing the
outcome, which often leads investors to
time the markets. So without making
predictions, what expectations should
we have for the stock and bond markets
and economy going into the end of
2016 and beyond?
First, and maybe most importantly,
expect stocks to be the best way to
grow your wealth and protect against
inflation over the long run. Consider
the last few decades: Since Total Bond
Market ’s inception nearly 30 years
ago, the bond index fund has returned
498.7%, well ahead of Prime Money
Market ’s gain of 182.8% and inflation,
up 117.5%. However, despite some
massive bear markets over the period,
you’d still have been much better off
capturing stocks’ returns over those
years. 500 Index’s 1554.3% gain tells
that tale.
Second, expect that owning stocks
will not be easy, whether you’re look-
ing to the end of the next month, year
or decade—they will not advance in
a smooth line. Since 1900, the Dow
Jones Industrials Average has expe-
rienced a bear market—a decline of
20% or greater—once every five years,
on average. Like the stock market, our
economy doesn’t advance in a smooth
line, either, and we’ve averaged a reces-
sion every six years since the end of
World War II. Of course, those are just
averages—neither stock markets nor
the economy are so accommodating as
to follow the calendar.
BEHAVIOR
Proper Expectations
CouldWeHave a Record
Long Expansion?
1933-1937
1938-1945
1945-1948
1949-1953
1954-1957
1958-1960
1961-1969
1970-1973
1975-1980
1980-1981
1982-1990
1991-2001
2001-2007
2009-today
0 20 40 60 80 100 120 140 160
Length of Economic Expansion (Months)
If no
recession
in next
presidential
term.
▼
A Normal Bull Market
Dow Price Return During Bull Market
Length of Bull Market (Months)
0 20 40 60 80 100 120 140 160 0%
50%
100%
150%
200%
250%
300%
350%
400%
450%
Length of bull market if no bear
market in next presidential term ▼
Current
Bull
Market
▼