Scott Kahan’s 2021 Market Outlook: It’s Not Rocket Science

Scott Kahan’s 2021 Market Outlook: It’s Not Rocket Science: We checked in with Scott Kahan, a Certified Financial Planner professional and CEO of Financial Asset Management Corp. in Chappaqua and NYC to get his take on 2021. And to see if the past year’s market volatility has changed his client’s perspective on investing.

We all got whipsawed in 2020. What do you tell your clients?

“In terms of voting. Ignore the markets. And in terms of investing. Ignore the election.”

The first thing I tell clients – if you didn’t realized this by now, 2020 was the perfect example of why people say you can’t time the markets. When the market crashed last March, some people had a strong urge to want to pull back on their exposure to equities, trash their plans, and go to cash. I did have some clients who saw it as a buying opportunity and increased their exposure but most people didn’t trust the market.

2020 showed us in dramatic fashion that the market is forward looking and it rebounded during the depths of the pandemic when things looked very bleak. The thinking then was that the economy was strong when we went into the pandemic and that would carry us to the other side.

Now with a new president the expectation is that we are going to have infrastructure spending which will create jobs. Vaccines are a positive which will allow people to get back to normal life including travel and restaurants and entertainment which is healthy for the economy. And why the markets can do well in 2021.

So what do we do now? 

The market is strong now and there are many positives ahead. But that doesn’t mean we can’t have a correction. We are overdue for a 10-15% correction. Could be 20%. The problem is that we don’t know when the correction will come. And we could see more gains before we get a correction. Which gets back to the issue of trying to time the market.

This is why it’s important for people to have their asset allocation models. If they do, they are likely to be overweight stocks, and if you are, it is a good time to rebalance your portfolio and take some profits.

And what are your clients moving into?

If you need cash in next 12-18 months or are a retiree you want to have cash available. Otherwise we are moving into short to intermediate term bond funds. We’re staying on the shorter end which is 1-3 years with some exposure to intermediate term funds which means 3 to 10 years. We tend to use funds but also use fixed income ETFs. By using funds and ETF’s, you can build your ladder without having to “actively” manage it. The funds and ETF’s will make needed changes as bonds mature or they sell some.

But don’t chase yield?

Everybody always wants a better return than the market is offering and it is tempting to chase yield. But if you go to longer maturity bonds you are only increasing your risk when rates rise. Dividend bearing stocks, like utilities, are another way people rationalize chasing yield. But utility stocks are not a bond substitute. They may give you a nice 3% dividend but when they go down when stocks go down too.

Relax on yield. If your portfolio is 60% equities you are going to get plenty of return. The bonds are there for safety and sanity and to keep you from panicking when the market declines. You know, if you are young enough and have a very long investment horizon you would do great with 100% in stocks. But you shouldn’t because you don’t know how you are going to react when the market takes a big hit. That’s the whole point of asset allocation modeling – it takes the emotions out of investing and helps you take control of your own sell signals.

Let’s talk about stock rotations

Yes, another thing I have my clients looking at is rotating allocations within their equity portfolios. The last few years have been a large cap growth market. During 2020 we did see some rotations into value and small cap but then a return to large cap and tech. Now we are seeing rotations again into small cap, emerging markets, and international stock funds.

We are also seeing rotations into consumer-oriented stocks, communications, financial services, industrials, health care. Historically value stocks outperform growth stocks. However, growth stocks have been outperforming value by the greatest margin in decades. We always incorporate value into our allocations.

How To Guard Against Lifestyle Green: It’s not rocket science

There’s no magic formula. Investing is basic. Long term buy and hold. Rebalancing to take advantage of market volatility. It’s a good time to remind people to stay focused on their financial plan. That is your road map. The plans we develop with our clients always begin with identifying their goals in life and their risk tolerance.

Then let the road map guide you through your investment decisions. That’s how you control your emotions and guard against periods of lifestyle greed leading you astray. It’s not rocket science.

Financial Asset Management Corporation has provided fee-only financial planning and investment management services for individuals and small businesses in the Tri-State area since 1986. They serve 175 clients and manage over 250 million dollars in assets. (26 South Greeley Avenue, Chappaqua, NY, (914) 238-8900; www.famcorporation.com )

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