More than bells this holiday season, I had a question ringing in my ears: “What should I expect from the market in 2001?”
My answer was always the same:”You tell me.”
That’s not cracking wise. And it has nothing to do with the fact that I long ago gave up on making market forecasts simply because I don’t need to go out of my way to embarrass myself.
It’s just that the personal expectations set by individual investors usually have nothing to do with the market (and frequently have no basis in reality). What you should anticipate from the market in the next 12 months depends entirely upon what you do and think now.
For example, few investors expected their diversified mutual funds to post a loss 12 months ago.
Never mind that the market had been on an unprecedented run and that it was only logical to anticipate a fallback. People just didn’t want to embrace the potential for negative news.
Besides, the stock market was darned close to a peak 12 months ago and things looked rosy.
That’s why so many people this past year were disappointed with mutual funds that beat the market — when the average Standard & Poor’s 500 index fund lost roughly 12 percent — but still posted a loss.
The expectation was to beat the market and/or the index funds. It was not to achieve such a victory on the negative side of the ledger, down 7 percent (which is approximately the loss the average diversified stock fund suffered in the year 2000).
Many people set their expectations on the basis of what they see on a magazine cover or what they hear from the most successful investor they know personally (or feel they know personally because they read a book or an article).
This is dangerous because investing’s dead men tell no tales. No one who has outsmarted themselves day trading or chasing the hot money in mutual funds is going to come up to you at a party and talk about how they are just about to lose their house or how they can’t send their kids to college next year.
Even the mediocre investors are likely to talk only about their winners.
Hearing all that, performance envy takes over.
Once you reach that point, your expectations are no longer to keep pace with the market, outgain inflation or to stay on track to financial goals. It’s simply to cash in, to do as well or better than the other guy.
“People need to get back to absolute returns, rather than looking at relative returns, and they need to go back to traditional expectations,” says Don Phillips, managing director at Morningstar Inc.
“In 1999, people were making 15 percent and were disappointed because they lagged the market. (In 2000), they were disappointed if they broke even, despite beating the market. You can’t have it both ways.
“People set their expectations based on the performance of their investments or market conditions, when they should set expectations based on what they need to succeed.”
Even by that standard, 2000 most likely will be judged as a rough year on investors. If, for example, you allocated your assets conservatively and forecast that the stock portion of your portfolio would return roughly 10 percent — the average annual long-term return of the market throughout history — you still were likely to be disappointed in 2000.
But you would be less disappointed than if you had expected a 30 percent return, which is what many investors had come to feel was “average” during the bull market of the late ’90s.
What’s more, the 10 percent expectation would have been greeted with such overperformance in the preceding years — where the market was right around that 30 percent target for several years running — that it would have made sitting tight and examining performance through a long-term lens easier.
Using that long-term perspective is important, particularly given the year that has just passed and the potential year ahead.
If you have a decade of investing experience, you have never seen the kind of market we are experiencing right now. The bear-market conditions of 1987 and 1990 were short; the downturns lasted about three months each and, in both cases, investors had recovered within 13 months.
But the average bear market throughout history has lasted about 18 months. If the current decline is simply the average bear market, it won’t be over until the fall.
If it’s worse than the average decline, 2001 could be just like 2000. Yuck.
“Some people’s expectations right now are that the worst is over, and they will sit tight and recoup everything,” says James Stack of Investech Research in Whitefish, Mont. “They expect a fast recovery. They need to think about what happens if they are wrong.”
This is where your own expectations come into play.
If your feeling about 2001 is that it’s going to be a nervous year for the stock market, decide what you should do about it.
Maybe you should diversify into bonds, international stocks or other sectors. They may not deliver the big dollars of growth stocks, but they will help to settle a queasy portfolio. Maybe you should sit tight, remembering that the time horizon for your investments is longer than the next 12 months.
But remember, your moves will be based on your own expectations, or those you take to heart.
Says Edward Rosenbaum, director of research at Lipper Inc.: “The temptation at times like this is to find a scapegoat, but not to share in the blame ourselves. As an investor, you share responsibility for bad returns with the people whose advice you choose to follow.
“If you decided that tech stocks were the place to be in 2000 and your tech fund manager had an average year — meaning he lost 39 percent — do you blame him or do you blame yourself for hiring him? Clearly, you should share some of the blame.”
There is no good mechanism for setting investor expectations for 2001 or any year.
That leads to the answer for what I “expect” from the market in 2001: It will be what you make of it, just like every other year. Expect a difficult market; that way, if you’re wrong (notice where I shift the blame), it will be a pleasant surprise.
