BY: Byron Moore, CFP®
posted July 3, 2018
“Should I be worried?”
In my world, you get this phone call on a regular basis. I’m actually glad to get it, because it gives me an opportunity to remind folks what we are doing and what we are not doing.
“The market was doing so well last year, now it’s really slowed down. Should I be worried?”
He was right. The stock market did extraordinarily well in 2017, much to the surprise of nearly everyone. Depending on which measuring stick you use, the United States stock market was up anywhere from 21% to 28% in 2017.
Now, things seem to have taken a pause. Is it North Korea? Or corn prices? What about all these new tariffs? The new tax law? The president? Congress? The Illuminati exercising secret mind control over the markets?
One of the fun parts of my job is reminding investors what they are doing and what they are not doing.
Investing is not speculating. Speculation is a guess without evidence. Short-term economic events, political situations or various world or financial crises certainly have impacts on markets. The problem is the direction and duration of the impact is nearly impossible to predict with any degree of regularity or accuracy.
The old joke about an economist who predicted thirteen out of the last three recessions makes the point. The broken watch is right twice a day. Beware the economic theorist or “advisor” who claims to be able to read the tea leaves in such a way as to detect the direction of the short-term shifting winds of the stock market or the economy with any degree of reliable accuracy or regularity.
Speculation is inconsistent, often costly and too risky for most folks.
Investing is not saving. But speaking of risk, investing is not risk-free either. That’s what saving is supposed to be all about.
The point of saving is to protect yourself and prepare yourself for the short-term. You save money for anything you cannot buy with a single paycheck. This is money you’ve got to have quick access to in the event of an unforeseen circumstance.
Saving is done at a bank, credit union or similar depository institution. Saving is not where you focus on the return on your money, but the return of your money.
Investing is participating with long-term trends of value creation in free markets. Humans have shown a remarkable track record of creating economic value for one another, resulting in higher and higher standards of living, which are reflected in prices.
So companies that successfully create value in our free markets are typically rewarded by being bid up in price (that’s what people do at an auction – they bid up the prices on the good stuff).
Companies thought to be doing a not-so-good job of creating value are conversely allowed to drop in price, as buyers don’t want to pay so much for a lessor performing player.
It might help to think in proportions. This is simply an example, but it isn’t far off real life. As an investor in the stock market, you should expect to have one year you are really excited about, one year you really hate and three years of yawning.
Rapid forward moves in the stock market are both uneven and often unforeseen.
The important thing to keep in mind is that picking individual winners and losers is really, really hard. Not impossible, just hard. So unless you know that you know that you are great at it, don’t try it.
Do what most good investors do and buy a broad portfolio of companies (most often done through owning shares of mutual funds) and rely on the long-term trend of free market economic growth to take over. This requires a lot of patience, a lot of discipline and the ability to avoid knee-jerk reactions when things aren’t going like you thought they would be at any given moment.
If you’ve been a good saver (which you should be long before you are an investor), you’ve got your short term needs for capital met. So you can relax about your long-term investment money.
That’s why its so important to be a good saver before you try to be a good investor.
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