What lies ahead for investors this year will surprise almost everyone. Yet I hear almost no one talking about it... and even less doing anything about it.
A quick look back at 2016 will show just what I mean.
U.S. stocks got off to a rocky start, you may recall. The Dow turned in its worst five-day start to a year ever, falling 1,000 points in the first week of trading. Pundits were nearly unanimous in claiming that this was a very poor harbinger for the rest of the year.
They were wrong. By mid-March, the Dow was back in positive territory. It hit a new all-time record in early July and finished the year up more than 18%.
Crude oil started the year with a belly flop too, hitting $26.21 a barrel in February, the lowest price since May 2003. Widely followed commodity expert Dennis Gartman - and many others - forecast that an “oil panic” would drive prices all the way down to $15... and perhaps lower.
Wrong again. By early summer, oil had nearly doubled. Prices bounced around but then spurted higher again in December, when OPEC agreed to reduce output.
Bonds also took investors on a wild ride in 2016. After the surprise Brexit vote, the yield on 10-YearTreasurys hit an all-time low of 1.366%.
Pundits came out of the woodwork to tell us that this was the “new normal,” that ultra-low bond yields were here to stay for years and possibly decades.
Wrong yet again. Yields soon went into reverse and rose more than a full point to 2.55% in late December. This was bad news for bondholders - since prices move inversely with interest rates - but good news for investors looking to capture higher yields.
The dollar has been in an uptrend for almost six years now, despite the conventional view that a lower dollar was “an absolute no-brainer.”
Yet the greenback continued its winning ways in 2016, hitting a 14-year high against a basket of major currencies and a 31-year high against the British pound.
You might think that with conventional wisdom and “the experts” entirely mistaken about stocks, bonds, oil and the dollar, there were no other major issues left to be wrong about in 2016.
Nope. The pundits, the mainstream media, the polls and even the futures market also blew the presidential election. (Hillary was a shoo-in, remember?)
In short, the thing most worth remembering about 2016 is not just that nobody got it right. It’s that just about everybody got it wrong.
So do you really want to kick off 2017 by listening to another batch of prognosticators tell you their macroeconomic views for the year ahead?
No, you do not.
Look, it makes sense to overweight assets that are undervalued, like emerging market equities, and underweight assets that are vulnerable to decline, like still low-yielding bonds. But you do not want to roll the dice with big-sector bets on oil... or gold... or U.S. large caps... or anything else for that matter.
It’s far better to begin this year - as you should begin every year - with a deep sense of humility.
As the historian David McCullough likes to say, “There is no such thing as the foreseeable future.”
So how do you run your money?
- You spread your risk among various asset classes: foreign and domestic markets, growth stocks and value stocks, high-grade and high-yield bonds, real estate investment trusts, precious metals, inflation-adjusted Treasurys, etc.
- You stick to high-quality securities.
- You diversify broadly within those asset classes to reduce your risk further still.
- And you adhere to a disciplined sell strategy to protect your profits and make sure a small loss never turns into a big loss.
Take the final step of minimizing your investment costs and tax-managing your portfolio - two important subjects we will revisit in the weeks ahead - and you are guaranteed to be ahead of 95% of other investors.
Because the winning investment prediction of 2017 is that this year, like every other year, will be largely unpredictable.