You sit down to breakfast, open the web page or your newspaper and the headline hits you right smack between the eyes: “Market Falls on _________ Uncertainty.” You can fill in the blank:
Global Concerns
Federal Reserve Meeting
Employment Report
Congressional Gridlock
The possibilities are endless, but there is a headline all stocked and ready for any given situation—conceived to draw you into the story and keep you glued to each successive story.
So what are the certainties in a universe of uncertainties and what can you do about any of it?
Let’s begin with what we know. We know history.
There is empirical history. And then there’s commentary and opinion, which get especially interesting depending on whose point of view is being espoused. There’s the potential for a hidden agenda or prejudicial point of view—just because someone says it doesn’t make it so, regardless of how many books they’ve authored or the initials that follow their name.
So what can we lean on when it comes to uncertainty and the fear it promotes? We can begin with a clearer understanding of what moves the markets, both in the short term and in the longer term. Yes, bad news or the anticipation of bad news moves the stock markets just as the hint of interest rates being lowered pushes it up. We have seen time and again that rumors and expectations create momentum in both directions and then when the event happens, the market remains flat.
There is a constant debate of cycles, trends, sectors, long-term bonds, hedging and a multitude of strategies that appear to serve as a fix for the uncertainties and volatility of the market. But let’s get serious: AT BEST, these are guesses!
Why not combat the overabundance of fear mongering and speculation with some very basic ideas:
- Decide when will you need the funds. If the need, under normal circumstances is far away, you can afford to ride out market volatility. Do not bet on the markets to act on your behalf over the short term.
- Quantify how much risk you must take to meet your goals. If you need to average, for example, 15% year over year returns, you’d better get ready to take some pretty big risks that might include losing your investment. Seek out the help of a professional advisor to help create a financial roadmap. Make sure you are not trading advice for a product sale or chances are high your plan will tilt in favor of the product being offered by the “advisor”.
- How important is your goal? If it’s of paramount importance that you reach a particular goal, then don’t just rely on market performance to get you there. The amount you save plays a far greater factor in your success than the returns provided by the markets.
- If you want market returns, invest in the broad market. Avoid active funds that promise superior returns, but after fees, expenses and tax costs, don’t consistently beat the market. According to an analysis using Morningstar, the average number of holdings in an average actively managed fund is a scant 131, putting investors at a clear disadvantage unless the manager can consistently pick winners.
- Understand that market movement is normal. Up markets, down markets, corrections, rallies, recessions are all part of being in the market and it happens without any help from you or the fun guys on Wall Street.
- Think globally. We all follow the Dow Jones Industrial Average, the Standard and Poor’s 500, the Russell 2000, but you also have to remember that Hong Kong, Singapore, London, Toronto, Australia, Brazil and on and on, all have markets, economies and cycles.
- The best chances for positive outcomes are derived from having a good understanding of financial matters combined with a clear picture of who you are and what you care about: your strategies need to make sense to you and must be aligned with your values.
It’s difficult to be the ‘rational’ investor in an irrational environment. You need to take your view from a time, diversification and comfort perspective. To enhance your chance to succeed, you need to be ok when markets are tumbling and stick with your plan. You must maintain discipline, consistency and belief that our global economy will, over time, return performance consistent with the risk you are taking. Lastly, you might need to cuddle up in a blanket full of uncertainty and ignore the dread and “what if’s” that pound your psyche. The only certainty that exists is that the headlines and stories will keep coming.
