I saw an interesting interview on CNBC the other day. A fellow was explaining how robots were actually better than humans in managing investment portfolios. Specifically, Ken Merkley of Indiana University was pointing to a study that showed ‘robots out-witted humans in making stock picks’. He put up some bullet-points to illustrate his argument and one of his key points was a comparison of two portfolios – with similar investment profiles – which showed the robots returned 6% while the humans only achieved 2%.

I don’t mind telling you that while my interest was tweaked, I couldn’t help having at least one eyebrow raised while listening to the good professor. The underlying problem I had with his argument was that the robots were following instructions (algorithms) that they were given by human programmers. It seemed to me that in a case where a human investor were to follow the same rules as those given to the robots, maybe they would make the same choices and execute the same (or similar) decisions. So, if that were true, would that erase the robot’s advantage? Or is there something else at play?

I think there is.

The difference is that the robots don’t care. They don’t get bogged down by losses and they don’t get too excited about their gains. They just do what the numbers tell them to do.

And that brings me to an article written by Lance Roberts and the reason today’s newsletter has the title it has. You can read his piece online at investing.com but I’ll share a couple of his key ideas here.

During strongly advancing, and very long bull markets, investors become overly complacent about the potential risks of investing. This “complacency” shows up in the resurgence of “couch potato,” “buy and hold,” and “passive indexing” portfolios. While such ideas work as long as markets are relentlessly rising, when the inevitable reversion occurs, things go “sideways” very quickly.

 “While the current belief is that such declines are no longer a possibility, due to Central Bank interventions, we had two 50% declines just since the turn of the century. The cause was different, but the result was the same. The next major market decline will be fueled by the massive levels of corporate debt, underfunded pensions, and evaporation of ‘stock buybacks,’ which have accounted for almost 100% of net purchases since 2018.

Market downturns are a historical constant for the financial markets. Whether they are minor or major, the impacts go beyond just the price decline when it comes to investors.”

Mr. Roberts says, rightly I think, investor psychology has a lot to do with portfolio performance, especially in the latter stages of bear markets. Simply put, and it’s understandable, as discomfort grows so too does the likelihood of bad decisions.

While there is a case to be made for “buy and hold” investing during rising markets, the opposite is true in falling markets. The destruction of capital eventually pushes all investors into making critical investment mistakes, which impairs the ability to obtain long-term financial goals. 

You may think you have the fortitude to ride it out. You probably don’t.

But even if you do, getting back to even isn’t really an investment strategy to reach your retirement goals.

It’s always enjoyable to see one’s portfolio expanding in value. However, that goal must always be tempered by the more important objective of capital preservation.

Generally speaking, Coronavirus notwithstanding, our bull is quite reluctant to exit stage left any time soon. Of course, his time will eventually arrive. In the meantime, we will do our best to keep a realistic view of what is actually occurring and react as dispassionately as the robots.

Ron’s Market Minute – Breaking News!

There actually is no breaking news, but I note that all of the TV networks seem to use that phrase in their daily titles. So… some news of note:

The S&P Index* has hit two new all-time highs since we wrote last week.  (Current all-time high is 3386.15)  There does appear to be some resistance around the 3400 level, so we may see that pause that I spoke about recently.  However, the powerful rally that began in October continues to be the strongest factor within global markets, and as you likely know the US markets are leaving the rest of the world in the dust. 

The magic continues to come from the Technology sector, as the US Nasdaq Index* continues to outperform the broader S&P 500 Index.  Note that the NDX index is currently about 7% above its 50-day moving average, and although investors are continuing to buy the ‘dips’ I continue to believe that things are looking stretched. The environment is even a bit reminiscent of the late 1990’s – although valuations are much healthier today than they were in those ‘olden days’. 

The FED notes continue to indicate that we are unlikely to see surprise increases in interest rates which would likely slow things down. Perhaps this is part of the reason we’re seeing an increase in home building – also contributing to the strength of the current rally. 

So, for now it looks like investors will continue to buy the dip, and be pleased with their results – until (of course) they are not.


Ronald P. Denk, CFP®
Investment Advisor
Denk Strategic Wealth Partners
10000 N. 31st Avenue, Suite C-262
Phoenix, AZ 85051
Phone (602) 252-8700
Fax (602) 252-8701
Toll-Free (877) The-Denk

This weekly article reflects news, commentary, opinions, viewpoints, analyses and other information developed by Denk Strategic Wealth Partners and/or select but unaffiliated third parties. DSWP provides Market Information for illustrative and informational purposes only. If you wish to receive this weekly commentary by email please contact us at 602-252-8700 or by e-mail at lindaw@denkinvest.com. If you are receiving this commentary via email and would prefer not to please let us know either by email or phone.

Ronald Denk is an Advisory Representative offering services through Denk Strategic Wealth Partners, A Registered Investment Advisor. He is also a Registered Representative, offering investments through Lincoln Financial Securities Corporation, Member FINRA/SIPC.

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*The indices are representative of domestic markets and include the average performance of groups of widely held common stocks. Individuals cannot invest directly in any index and unlike investments, indices do not incur management fees, charges, or expenses, therefore specific index returns will be higher. Past performance is not indicative of future results.