The supreme test of market prowess is to "beat the market" by picking the right stocks at the right moment. Such talent requires keen analytic skills as well as confidence in the direction of a stock, a sector and other fundamentals. The dominant market-beaters had the ability to see the future of a stock in the maelstrom of thousands of variables.
Investors and financial advisers alike sought the best stock-pickers through separate accounts or mutual funds. Money managers were under constant pressure to demonstrate the superiority of their picks.
Then came the last two years when the fundamentals of individual stocks lost their significance to big-picture forces at play in the broader market.
The economy, politics and regulation are now moving the market. The result is that market movements are all correlated: Everything rises and everything drops at the same time in response to same information about housing, about taxes, about new legislation, about the deficit.
The stock-picker's value was the ability to sort through all of the data and identify opportunities that would rise well above the benchmark. Opportunities that did not correlate with the course of other stocks were ferreted out by the top pickers.
Investors now trade baskets of stocks all at once. Exchange-traded funds (ETFs), with their low costs and tax efficiency, have become popular. The indexed ETF baskets provide unparalleled diversification and allow investors to more easily weigh exposure to specific economic sectors or specific economies (countries). ETFs now account for 30 percent of the daily stock-trading volume.
According to a recent article in the Wall Street Journal, stock-pickers are discovering "that long-held investment strategies are no longer working very well."
One researcher is quoted by the Journal as saying, "Stock-picking is a dead art form. Macro themes dominate the market now more than ever."
The unprecedented high correlation among stocks at present has made it difficult for managers of open-ended mutual funds to distinguish themselves, as they have in the past, through their stock-picking acumen.
For the small investor who dabbles in picking a stock here or there, the big-picture forces in the market today make little matter. But for those serious about how their money is managed, the recent turn toward broad correlation further underscores the risks of individual stocks. Most serious investors are less interested in beating the market than meeting their own objectives by managing risks through broad exposure to the market and not single companies.
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Donald E. Askey, a Certified Financial Planner™ professional and president of Provident Advisory Group, is a registered fee-only adviser, now headquartered in Newburyport. For questions, visit www.providentadvisory.com.