How to Profit From the Coming Correction

US News

In November 2013, I wrote an article in The Huffington Post, addressing the phony "debate" among pundits over a possible market correction. The Dow Jones Industrial Average closed that day at 15,967. On July 7, 2014, it closed at 17,024.

In that article, I railed against the " gurus" then making predictions about when the inevitable market correction would occur. I noted there were good arguments on all sides of this issue, but the reality is only the most dire predictions usually garnered the headlines.

I don't question the right of anyone to express their views on the future of the markets. But I do find it irresponsible when market pundits are featured in the financial news giving opinions about random events. They don't have any accountability when they are wrong. Investors who hold the mistaken belief that these pundits can predict the future are collateral damage.

Those making predictions have an agenda. They want publicity for their services and products. They also want to position themselves as someone with unique insight, so they will earn bragging rights for accurately calling the next correction.

Few investors understand the difference between luck and skill. I have seen precious little evidence that anyone has the skill to predict the future. By random chance alone, some will guess right. But that doesn't make them experts. They were simply lucky.

The charade continues. A recent CNBC headline blared: "Why this bullish pro sees market drop soon." A June 17 CNBC headline speculated that Iraq could be the "trigger" for a stock market correction. Wharton School professor of finance and author, Jeremy Siegel, disagrees. He has said the Dow could go to 20,000 by year-end.

Many investors feel they are caught between a rock and a hard place. Do they "sit on the sidelines" as some pundits advise and await the coming correction? Or do they stay invested and avoid missing out on the continuing bull market? The answer may surprise you.

You should ignore the bulls and the bears. Responsible and intelligent investing has nothing to do with relying on a predictive expertise that doesn't exist. Here's what your broker doesn't want you to know: The entire concept of investing based on identifying mispriced stocks and predicting economic and market conditions is not just fatally flawed. It's part of an insidious strategy to transfer wealth from those who earned it to those who "manage" it.

There is an alternative. It requires a commitment by you to open your mind, discard your biases and learn about it. Here it is in a nutshell:

Portfolio returns are driven by your allocation between stocks and bonds. You can make this determination yourself, based on the amount of risk you are willing to take.

Some asset classes ( small cap and value stocks) have historically delivered higher returns over long periods of time, according to analysis of historical data from 1927 to 2004 by Professor Kenneth French of Dartmouth's Tuck School of Business, albeit at increased cost and risk. By structuring your portfolio to tilt towards those asset classes, you may be able to increase your expected returns.

There is also support for the idea that companies experiencing a large increase in the price of their stock will continue to experience increases.

The returns of the fixed-income portion of your portfolio are largely determined by credit (lower vs. higher credit quality) and term (longer vs. shorter maturities).

The critical factor that distinguishes investing based on these premises is that they don't involve predictions about the future. They are solely within your control.

There is a reason why so many of the smartest academics in the world recommend investing based on these sound principles. They have spent their lives studying the capital markets and publishing peer-reviewed papers in scholarly journals.

There is also a reason why famed investor Warren Buffett has instructed his trustee to invest in index funds upon his death. Buffett is quoted as stating that he believes "the trust's long-term results from this policy will be superior to those attained by most investors - whether pension funds, institutions or individuals - who employ high-fee managers."

You do have a choice, but it is not the one posed by the conflicting views of self-styled "pros." Opt out of a system designed to profit everyone but you.

That's the way you can profit from the coming market correction.

Dan Solin is the director of investor advocacy for the BAM ALLIANCE and a wealth advisor with Buckingham. He is a New York Times best-selling author of the Smartest series of books. His latest book, "The Smartest Sales Book You'll Ever Read," has just been published.



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