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Don't Let 2014 Predictions Turn Into Conviction

NEW YORK (FMD Capital Management) -- This time of year is chock full of predictions designed to guide your investment decisions in 2014. There are forecasts for top performing stocks, the direction of interest rates, fiscal policy timing, commodity estimates, and many more. For every bull there is usually an equal and opposite bear that claims to be an expert on these topics. This bifurcation can lead to a confusing stream of conflicting messages that hinder your decision making process.

At the end of the day, forecasts are really just educated guesses based on past experiences or data that shape our future outlook. When you place too much confidence in these predictions, it can lead to steadfast conviction. That is when things turn dangerous for your wealth.

Conviction is probably one of the single biggest performance killers in the history of investing. Bill Ackman found that out the hard way this year when he shorted Herbalife (HLF) with a significant sum of money and refused to capitulate. There are numerous other examples of investors that refused to adapt to the market's reality and paid the price for this stubborn behavior.

In a year when the SPDR S&P 500 ETF (SPY) has returned 28%, many investors are probably thinking to themselves that this 4-year bull market is ripe for a pullback. Some might even suggest that we are overdue for a new bear market cycle. While that may be the case, there is nothing at this point to suggest that we are going to see an immediate change in direction. Even a modest pullback in December would likely be healthy to start 2014 at a more attractive level.

Trying to call a market top or taking a significant step to take risk off the table is a sure fire way to ensure that you don't get caught in the next downturn. It's also a great way to guarantee that you aren't able to experience any growth in the coming weeks, months, and years ahead. One thing is for certain, the market can stay irrational much longer than you can stay solvent.

My advice is to follow the trends of the market and make changes that suit your risk tolerance and time horizon. You should let price be your ultimate reality when it comes time to buy or sell a particular position. One of my favorite guideposts is the 200-day moving average which gives me an indication of how stocks are performing in relation to their recent history.

Right now SPY is approximately 8% above its 200-day moving average and still in a long-term uptrend. If we saw a break below that long-term trend line, I would look to lighten up my stock exposure and transition to a more defensive allocation for my clients. Until that time, I am continuing to stay balanced and look for investment opportunities that will enhance the characteristics of my portfolio strategy.

Plan for Success in 2014

Instead of listening to predictions, your first step in preparing for 2014 should be to come up with a game plan. Below are some guidelines to help you with this task:

  1. Write down your goals and put them in a place where you can review them often. That way you can monitor your progress and ensure that you are on track to meet your performance objectives. If you are working with an adviser, it always makes sense to get on the same page with them at the beginning of the year so that they understand your expectations.
  2. Tune out the noise from the mainstream media and focus on making sound portfolio strategy decisions that allow you to sleep well at night. There are always going to be risks with putting money to work in stocks, bonds, or commodities. However, you can position your portfolio to achieve lower volatility and capture your desired returns with the right asset allocation strategy.
  3. Make sure that you have a watch list of holdings that you will be looking to take advantage of in 2014. I monitor both growth and income opportunities across a variety of ETF, mutual fund, and closed-end fund vehicles. That way I am always ready to put cash on the sidelines to work if we get a pullback or an entry point presents itself.
  4. Stay balanced and humble with your portfolio as we move into the new year. There will likely be a great deal of changes ahead that will impact your decisions, and risk management will play a big factor in hanging on to your hard-fought gains.

The one prediction I am willing to make for 2014 is that the markets will keep us on our toes and we will have to adapt to changing dynamics. What that may ultimately look like is anyone's guess. By staying nimble and having a pre-set plan, we will be able to sidestep any major setbacks and profit when opportunities present themselves.

At the time of publication the author had no position in any of the stocks mentioned.



This article was written by an independent contributor, separate from TheStreet's regular news coverage.

Stock quotes in this article: SPY, HLF 
David Fabian is a managing partner at FMD Capital Management, a fee-only registered investment advisory firm specializing in exchange-traded funds. He has years of experience constructing actively managed growth and income portfolios using ETFs. David regularly contributes his views on wealth management in his company blog, podcasts and special reports. Visit www.fmdcapital.com to learn more.

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