Regression to the Mean

Certainly global stock markets have gotten off to an ugly start in 2016.  Don’t panic! Maintain your long-term asset allocation policy, and since most equity-oriented assets have seen significant pullback, this means re-balancing back to policy normal levels. Why? There are significant regression to the mean tendencies in our markets, and as a reminder, it is much better to buy low and sell high.

This is not to say that our markets are stable, that equity markets can’t fall further from these levels, but we would caution you on selling into this weakness only to lock in losses that are only on paper at this time.  Furthermore, although the US economy appears to be slowing (Atlanta Fed is forecasting a 0.8% Q4’15 GDP growth rate), we do not see a recession in the foreseeable future, and significant market corrections are usually driven by recessionary environments.

Unfortunately, most of us have become traders instead of investors, and that goes for holders of mutual funds and ETFs and not just individual stock pickers.  Given the significant pullback in stocks associated with energy (-21% to as much as -47%, depending on the market capitalization index) and commodities ( -32.9% in 2015), and those impacted by the hit to energy and commodities, including emerging markets (-14.6% in 2015), miners, transportation companies, and MLPs (-32.6% in 2015), there are some significant dislocations that might just provide very attractive long-term opportunities.

If you already have a policy allocation to some of the above mentioned instruments / exposures, re-balance back to policy.  If you don’t currently have exposure to these potential investments now is a great time to begin educating yourself on the products available to you.  Don’t worry, they’ve been beaten down so badly that you won’t miss the opportunity, if you don’t get into them today.  Happy hunting!





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