A Data-Driven Approach; Taking the Emotion Out of Investing

Jan 19, 2023 8:02:44 AM

Have you ever woken up in the middle of the night with a weird pain, elevated heart rate, or a general concern for your health? How often have you been warned, “don’t Google it!” Unfortunately, doom-scrolling, and late-night, fear-based internet searches will inevitably produce a plethora of worst-case scenarios offering little to allay your fears.  

An ill-advised practice if you are hoping for a good night’s rest.  

The same can be said about your relationship with finances and investments. There is a much better way to manage risk and navigate the inevitable ups and downs of the market. Consider this a friendly reminder to resist the fear-based urge to search the internet for remedies for financial stress. You might find yourself in the worst-case scenario land, and if you don’t have a solid financial plan already, it can take a toll on your emotions.  

Speculation about the stock market, the economy, and inflation are rampant. It’s easy to give in to emotion during periods of volatility and uncertainty. Yet, decades of experience have taught us to take the emotion out of investing using a risk-managed, data-driven approach.


Keep Calm and Carry On  

If you are a VGA blog reader, you know that we have been writing about long-term financial goals and time horizons, risk tolerance, preparing for storms, climbing and descending mountains, and finding the goldilocks zone with your portfolio management strategy.  

We are tactical and believe in having a strategy for whatever market risk the economic universe sends our way. We are prepared with our defensive players to protect equity exposure when the economic backdrop shows deterioration. Conversely, we use our best offense to leverage opportunities when the markets are favorable.  

Success over the long haul is defined by research and strategy, not by being reactionary to market conditions. The biggest mistake investors make is letting emotion dictate their investment decisions.  

Let’s say markets are down, and you start to panic and sell. Automatically, you’ve crystallized a loss through taxes.   

Conversely, if you create a portfolio using risk-managed investment strategies, you seek protect your core against significant market declines by giving up a little of the upside potential. Then, when the proverbial storm clears, you have far less of a hole to dig out before making money again.  

For example, in 2022, our Russell 3000 Dividend Strategy was only off 0.5% last year and is now +2% YTD. So, it fully recouped the previous year’s drawdown and is now back to making money for clients.  
Many other non-risk managed funds will spend most of 2023 recouping from losses after a –19% S & P 500, a –33% Nasdaq, and a –47% FAANG+ year. 

“When the markets are down and all the talking heads on Wall Street are talking about how bad things are, there is a propensity to think, oh, it’s just getting worse and worse. Well, in reality, that is when there is opportunity.” 

Clark Richard, CEO, Vineyard Global Advisors 

data driven investment strategies

Preparing for Anything 

It’s hardly a wonder that so many Americans have a gloomy economic outlook when forecasting for 2023. They have been inundated with a 24/7 news cycle constantly warning of potentially looming disaster. 

According to a recent Gallup poll, inflation, higher taxes, political conflict, and ongoing instability overseas are top concerns. Because so many studies have reiterated the same worries for 2023, preparing for anything seems the safest action to take.  

According to a Moody’s Analytics analysis, the average American household spends as much as $460 per month more for the same goods and services as last year. This makes hedging against inflation a good plan but knowing how to do this is more complex than it seems.  

A Fidelity Investments Poll for the 2023 Financial Resolutions Study found the following to be the biggest concerns for the new year:  

Inflation- This tops most lists as the biggest worry for 2023. There are signs that inflation might be easing, but it will take time. Follow a budget, manage expenses and conserve cash.  Prepare for a volatile market, and make sure you know where you are in your investing lifecycle. Then, find an investment manager to help.  

Recession - we have been warned it might be coming, but there is no guarantee it will. Boost your savings and build an emergency fund to cover essentials for at least three months. Reassess your investing strategy and philosophy to match the volatility.   

Unexpected Expenses - again, the emergency fund is the best preparation method. It has never been a better time to organize your finances and get out of an emotional or fearful mindset. 


Using historic data

A Data-Driven Approach; Reading the Tea Leaves in Historic Models 

So, which of these things is sure to happen? Inflation, Recession? Maybe all, and perhaps none. Few agree about where we are headed in 2023.  

Some are optimistic,  

"Better outlooks are already materializing, with many seeing the Fed continuing to raise rates in the first quarter, pausing in the second and possibly cutting rates in Q3 or Q4." (Seeking Alpha, 1-3-23)  

Others, even the Federal Reserve, express uncertainty,  

"Federal Reserve Chair Jerome H. Powell was asked what was in store for the economy after yet another rate hike intended to tame inflation." He said, "I don't think anyone knows whether we're going to have a recession or not and if we do, whether it's going to be a deep one or not." Powell said on Dec. 14, after the Federal Open Market Committee's final meeting for 2022, "It's just not knowable."  

There's no shortage of speculation about what the next year holds. Yet, a deep dive into our historic models demonstrates two specific and compelling patterns that point to a potentially smoother road ahead for 2023 than most are currently predicting.   

First, we are in the third year of the Presidential Cycle, which historically has produced an average gain of +17% with a 94% chance of a positive year. These cycles also tend to see volatility fade as the year progresses.  

Second, 2022 was one of 7 of the worst years in the stock market since 1928. Yet, alongside those gloomy statistics are some striking statistics. Eight times since World War II, in instances where the S & P 500 dropped 15% or more AND also had a down December, significant patterns of market recovery emerge with an average gain of +21% a year later.   

Although investors should be aware that this trend has challenges, and additional volatility and drawdowns are expected, particularly in the first quarter, these analogs demonstrate a potentially different market landscape than the current doom and gloom suggest.   

One of the best ways to take emotion out of investing is to find an investment advisor who understands risk and sees the opportunity in any case scenario. Preparing for any weather is the best way to face whatever comes our way.  

Read more about VGA and our risk-managed strategies or Contact Us to discuss more. 

Vineyard Global Advisors offers a range of investment strategies designed to allow participation in the market's growth within a dynamic, risk-managed framework that seeks to offer protection during significant market declines. Our goal is to give our clients greater peace of mind by generating steadier returns over time. 

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