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Lies, Damned Lies and Statistics: Which Do You Believe?


Statistics can be interesting, but without context can also be very misleading. As the British Prime Minister Benjamin Disraeli (an later, Mark Twain) famously observed, “There are three kinds of lies: Lies, damned lies, and statistics.”

For example, $125 billion has been invested in equity ETFs in the last quarter. Sounds like a lot, doesn’t it? But is it a “net” figure? No–and that changes the picture. During the same period, $100 billion managed by institutional investors also moved out of ETFs. The significance for me is that there is still a lot of cash sitting on the sidelines.

Here’s another example of why you can’t take big statistical pronouncements at face value. The market had a correction in 2011, but back then many did not really think of it that way because the overall picture still looked very good. With over a 20% swing in the late summer and early fall that year, few tagged it as a correction, and just dismissed it as evidence of a volatile market.

But viewed from the perspective of the last 50 years, it certainly meets my definition of a correction. Why does this matter? Because it debunks the idea that the market is due for a drop because it hasn’t had a correction in eight years.

Washington Turmoil

It’s also true that the market has gotten a little jittery with the turmoil in Washington after House Speaker Paul Ryan and President Trump were forced to pull the plug on the House Republicans’ Affordable Care Act “repeal and replace” effort. Regardless, we believe there is room for the market to grow even–if the Trump Administration isn’t able to do all that it has promised.

Why? Fundamentally, because the economy is moving upward. consequences of being out of the market when it’s heading up. Although Morningstar recently reported that American investors are at all-timeAnd it’s important to keep in mind the  highs in their equity allocations (at 60%), they still have plenty of cash sitting onhe sidelines, like the institutional investors.

In its 2014 Guide to Retirement, JP Morgan Asset Management illustrated what can happen to investors’ returns when they miss out on the good days. For instance, an investor who had stayed fully invested in the S&P 500 from 1993 to 2013 would have enjoyed a 9.2% annualized return. Not too shabby!

However, if jumping in and out of the market caused that investor to miss just the ten best days during that same period, those annualized returns would collapse to 5.4%. That’s because by missing those days, the investor lost out on the opportunity for those gains to be compounded over the duration of the investment holding period.

What we have done in this environment is to focus on optimizing our allocations to different segments of the market, and set trading boundaries. The composition of the equity holdings may change slightly over time, but we will keep our overall equity allocation constant.

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