Stocks rallied in April, closing at the high for the year and the highest level in three years. With stocks up 9.1% through April 30th versus our 2011 forecast of 8%, we see stocks as fully to slightly overvalued. In fact, given the lack of substantial "new" news to push stocks one way or the other, we expect a 10% trading range that could last through the summer and into the fall. On February 28th, David Edwards commented on Bloomberg Radio that "the S&P 500 could fall 10% in the next six months," but that he wouldn't change his strategy because he expected a 20% rally on the other side. In fact, stocks fell 7.1% over the next three weeks then regained the entire loss over the following 5 weeks. So the risk of that 10% correction remains. As we are not making major strategy changes at this time, we will devote this commentary to the issue that concerns our clients the most:
What is the greatest investment risk? The risk that money won't be there when you need it!
An investor's biggest fear is that money won't be there when needed. Two decades ago, we thought that "beating the averages" was our prime directive. Now we believe that our mission is to "achieve our clients' financial goals with the least amount of risk." Not a glamorous philosophy, but one that helps our clients sleep at night!
Dalbar, a Boston based research company, publishes each March the "Quantitative Analysis of Investor Behavior," which analyzes mutual fund flows to determine average investor results versus average mutual fund returns, and versus indexes such as the S&P 500 and Barclays Aggregate Bond Index. For 17 years, the study has shown the same results: individual investors received substantially lower returns than either the average mutual fund return or the overall market return. Why? Investors generally hold funds for 4 years or less, often chasing funds with highest recent performance, even though such performance is rarely repeated. In general, investors buy funds when markets are rising, and sell funds when markets are falling (classic "Buy High/Sell Low" behavior.).