In an unpredictable world, relying on forecasts can be a flawed investing approach because forecasting is often driven by behavioral bias rather than genuine informational value. That’s why, at MSCM, we believe that instead of trying to predict the future, a more effective strategy is to adopt a rule-based, adaptive approach that responds to the current market environment.
The Problem with Predictions
The prevailing geopolitical and domestic political climate, defined by evolving fiscal and trade policies along with new battlegrounds in AI, highlight the limitations of traditional forecasting. Relying on “expert” forecasts can serve a more emotional purpose than a rational one. It allows individual investors, as well as those with investment committees, to externalize risk. When an investment performs well, it reinforces their belief, but when it performs poorly, blame can be shifted to the external expert. This cycle can hinder genuine accountability and lead to a potential pattern of underperformance against benchmarks.
We believe the core challenge isn’t predicting the future, but rather navigating it effectively. While a passive, buy-and-hold strategy is an option, it requires significant behavioral fortitude to withstand severe market downturns, making it difficult to maintain capital preservation during periods of extreme volatility.
A more robust and disciplined alternative is to embrace a rules-based, adaptive strategy. This approach involves:
- Establishing a robust framework: Create a predefined set of rules that dictate investment decisions based on what the market is actually doing, not what it’s expected to do.
- Removing emotional bias: Adhering to a systematic process helps eliminate emotional and psychological pitfalls, such as panic-selling during a downturn.
- Focusing on trend and momentum: A trend-following model, for example, assesses daily market action to determine if the markets are in an uptrend or a downtrend. The “why” behind the market’s movement, whether it’s geopolitical tension or central bank policy, becomes irrelevant. The focus is simply on responding to observable data.
This approach is designed to allow investors to participate in market rallies while systematically moving to a defensive posture when predefined sell signals are triggered. While past performance is not necessarily indicative of future results, by focusing on assessing the current market environment rather than guessing about its future investors can build a more resilient and disciplined portfolio management strategy.
How MSCM’s Strategies Support This Approach
We provide a clear example of this philosophy in our practice. Our strategies, like Trend Plus and Sector Rotation are explicitly designed around a rules-based, tactical framework. These strategies are not based on predicting market direction but rather on identifying and reacting to existing trends and momentum. By deploying capital to equities during uptrends and shifting to more defensive positions during downtrends, our approach aims to participate in market upside while mitigating downside risk through pre-defined rules. This systematic process removes emotional bias and focuses on capital preservation, aligning directly with the principles of a reactive, adaptive investment strategy.
To learn more about us and our strategies visit www.mscm.net, follow us on LinkedIn or email info@mscm.net.
Past performance is not necessarily indicative of future results. Investing involves risk. Principal loss is possible. McElhenny Sheffield Capital Management (MSCM) is a registered investment adviser with the U.S. Securities and Exchange Commission (SEC). Registration does not imply a certain level of skill or training. Important information pertaining to MSCM’s advisory operation, services, risks, and fees is set forth in MSCM’s current Form ADV Part 2A brochure, a copy of which is available upon request or at www.adviserinfo.sec.gov or www.mscm.net.