Regain Control of Your Investments
Keeping that "trepidatious wall of worry" at bay
We are a nation of worriers. And lately, when it comes to fretting about the capital markets and the economy, it seems we have elevated worrying to an art form. Just the other day, I heard a national news announcer proclaim that investors had become "trepidatious" in response to recent market volatility. Huh?
The headlines have been especially rife with worries concerning issues in recent quarters: the credit "crisis," a potential inflationary spiral... or wait, is it stagflation? Then there are record-breaking prices for crude oil, gold, corn, copper, and other commodities; ongoing uncertainly over who will be elected president; and questions regarding what will be done with income tax and/or capital gains rates. And of course, there are the dollar woes, real estate woes, employment woes, etc. Since most people already are instinctively inclined to favor focusing on the short run, the chance to obsess over each dire headline provides one more excuse to delay or sideline an investment program.
When it comes to pondering our financial affairs, we unfortunately tend to worry a lot about things we can't control, rather than spending time planning for, or around, the things we can. As behavioral scientists are learning, we can't help some of these tendencies. Our brains were hard-wired to think this way many centuries before we were born. Even if there are only a few similarities, our desperate attempts to "make sense" of our environment prompts us to infer a pattern and a similar outcome.
The problem with all of this worrying and pattern presumption is that when it comes to our own financial affairs, it can easily distract us from more productive tasks. If we view the current situation as scary and likely to play out in the same manner as a prior stressful period, we may be less inclined to take calculated risks or embark on new opportunities, even if the risk/reward pay off is substantially in our favor.
Despite the vast ocean of "stuff" that investors always seem to be worrying about, the stock market itself appears to be shrugging off much of the news and holding up reasonably well. As any Wall Street veteran can tell you, this is indicative of markets doing what they do best: "climbing a wall of worry." In other words, markets tend to meander upward while investors wring their collective hands every step of the way.
While the rate of economic growth may ebb and flow from period to period, statistics support the notion of upward bias. According to Ned Davis Research, U.S. GDP has averaged an increase of more than 3 percent after inflation each year since the mid-1960s. The equity markets, as proxies for economic and corporate activity, have also illustrated an undeniable long-term upward trajectory. According to data complied by Crandall Pierce and Company, the total return of the S&P 500 has averaged nearly 13 percent per year since 1950. More notably, the index has registered an increase three out of four years on a year-by-year basis, or 76 percent of the time.
Yet, the catch for many individuals lies in the fact that the long term is made up of a lot of "short terms"—which is where we all live, think, and react. In the short term, markets plummet, economies go down, wars erupt, and industries go into death spirals from which they never recover. Then we worry. And sometimes we worry to the point of panic.
Don't get us wrong. We know there are plenty of things causing plenty of pain for individuals, businesses, and regions. The point is there always are. But the incredible flexibility of our financial and political systems is what has allowed our country over the centuries to rise so successfully above what, for many other places, would be disruptive or dismantling events. When the pendulum swings too far in one direction (e.g., under-regulation versus over-regulation, under documenting loans, or being too blasé about risk assessment), the system eventually moves toward correcting itself. We unwind major industries and retrain, as well as reabsorb expertise, into previously unimaginable or unheard of careers and industries.
As we've stated many times in this space, the key to carrying out a successful long-term financial management and investment program is to learn to ignore the dissonance of headlines if they distract you from taking the interim steps necessary to achieve your goals. Here are a few suggestions to help you traverse that tricky path—and keep your own "wall of worry" at bay:
- Clearly identify which of your assets are needed to fund long-term goals, as well as those needed for shorter-term expenditures. It may be easier to ignore the headlines with respect to a portion of your investments if you know your near-term needs are covered.
- Be honest with yourself about adequately preparing for the long term. Don't just say, "I don't know how much I'll need for the car next year, so I'll wait to start investing in my 401(k)." The sooner you start, the better (as it allows the magic of compounding to work in your favor).
- You do not have to have all of your assets in or out of a particular investment or market at once. It's been proven time and again that no one possesses a black box to accurately predict market turns. If you feel yourself readying to "make a reaction" rather than "take an action," try to do it in steps. For example, you may consider shifting only half your allocation or buying one third of a position this quarter and another third each of the next two quarters.
- Pay more attention to fundamentals than headlines. In the long run, strong fundamentals and growth are undeniable. The current fundamentals and valuations—at least on a broad corporate level—are much different than they were in 2000. Today, business conditions are arguably solid, especially for those who sell to overseas markets (i.e., nearly everyone). Plus, valuations are lower and already reflect conservative expectations.
- Just for fun, start keeping a list of what's dominating the headlines. Jot in your daily planner the broad economic "concern de jour." You'll be amazed at what we, as a nation, were fixated on a quarter or two ago—let alone a year or a decade ago. Remember the Y2K meltdown, the "imminent" bird flu pandemic, our inability to settle the presidential election of 2000, outsourcing, anthrax, escalating government debt, too strong a dollar, too weak a dollar, etc.? All seemingly "trepidatious" events of this decade.
Clearly, the impetus to continue building the Wall of Worry appears to be alive and kicking. Short-term worries can preoccupy even the most optimistic investor. Still, the positively sloped long-term bias of the markets tends to make staying the course the most sound response.
Carol M. Clark, CFA, is a partner and investment principal of Lowry Hill, a private asset management firm that provides proprietary investment management and financial services to families, individuals, and foundations with wealth greater than $10 million. The firm manages approximately $6 billion in assets for nearly 300 families and more than 60 foundations from offices in Chicago, Minneapolis, Naples, and Scottsdale. She welcomes questions and comments at firstname.lastname@example.org.
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