“Smart Money” Fact and Fiction
In the first half of 2021, the American economy and equity markets continued to recover from the COVID-19 pandemic. As I write this the S&P 500 sits at 4,367 nearly double the Covid low point of 2,200. It’s an artificial crossing point but one sure to generate buzz in the media with the standard chatter that markets have moved too high too quickly and what the “smart money“ is doing about it.
Smart Money is Not Information
It’s an easy story to sell – secrets the informed insiders are doing that you and I as outsiders are missing. There was a time when research and access to information could give you an edge but that time has come and gone. If you need information, search for it on Google. Knowledge is knowing that a tomato is a fruit. Wisdom is knowing not to put it in a fruit salad.
Wisdom alone is not enough. Consider Alan Greenspan’s speech on December 5th, 1996 where he famously cautioned the markets with his statement “Irrational Exuberance”. I would argue that there are only a few people on the planet that have the same access to information and wisdom to assess it as the chairman of the US Federal Reserve. On that day the S&P 500 sat at 744 and it would go on to nearly double over the next 3 years before we had the 2000 “Tech Wreck” – which never dropped as far as the day he made that prophetic phrase.
There are a lot of smart people out there telling us what to do and backing up their arguments with compelling data. If only intelligence, analysis, and a good story were enough. But I’d follow Mark Twain’s advice – ‘It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.’ As a corollary, it’s often what we don’t know and couldn’t know that becomes the issue. For example, no one was talking about or predicted the global coronavirus pandemic.
Who is the “Smart Money”
You have to ask yourself if what “they” are claiming to be in their best interest is in your best interest as well. Wall Street brokers make money when people trade securities. The idea that you can short-cut success by getting out ahead of market swings is very profitable for these firms.
When it comes to markets, there are generally two sides to every trade. Traders try and take advantage of short-term mispricings in the pursuit of creating wealth. This is often in sharp contrast to investors – who also want to make money – but are focused on longer-term capital appreciation.
Wealth creation and wealth preservation require different skills. Wealth creation is exciting and usually includes taking on a high degree of risk. Focus, hard work and consistent reinvestment are necessary to create wealth. The key to remaining wealthy, however, is to allocate resources in a broad, diversified way. By contrast, staying wealthy can be boring and tedious.
Wealth is often created through controlling variables and making difficult decisions. Diversification, by contrast, requires you to relinquish control of the parts while you manage the process: your retirement income, your investment portfolio, your taxes, and your asset protection strategy. If your focus is on wealth preservation, then your best course is to focus on long-term investing and disregard news related to short-term trading schemes.
Smart Money is About Process
In a 12/31/13 Bradenton Herald article I wrote about Nick Saban and his relentless focus on “The Process”. Nick’s paradox: “The more one emphasizes winning, the less he or she is able to concentrate on what actually causes success.” Alabama football, the most successful program of all time, wins by focusing on what they can control – their plan.
Stephen Covey speaks to Circles of Influence and Concern. To focus on our concerns is a reactive process that may lessen our ability to influence outcomes. By focusing in on our influence we are more proactive and have the greatest impact on things within our control.
Smart money ultimately then is acting continuously on a rational plan—as distinctly opposed to reacting to current events. With this proactive approach, we have the best chance of long-term investment success. As we get into the back half of 2021, it’s a good time to re-evaluate your priorities and organize your affairs. Focus on what you can control and measure your progress. In summary, plan your work, work your plan.
Gardner Sherrill, CFP®, MBA, is a CERTIFIED FINANCIAL PLANNERTM professional with Sherrill Wealth Management. To learn more, visit sherrillwealth.com, a Bradenton wealth management firm specialized on living in retirement.
This information is not intended to be a substitute for specific individualized tax or legal advice. Individual circumstances will vary. Please see your tax professional regarding your specific situation.
The opinions expressed in this material are not intended to provide specific advice or recommendations for any individual.