Investors experienced a 100-year flood in 2008-2009 and now it seems a broad array of media outlets endlessly bombards us with new, impending 100-day floods that are expected to drown investment portfolios and wash the economy into recession. The -3% drop in the S&P 500 index during August is symptomatic of investor nervousness.
This is nothing new. The media has been reporting scary forecasts every day over the last four years. Yesterday, we heard about the flash crash, Dubai, debt ceiling debate, Greece, Cyprus, eurozone demise, presidential election uncertainty, fiscal cliff, Iranian nuclear threats, North Korean provocations, and other potentially deadly floods.
Today, the worrisome flood forecasts include Syria, bond tapering, rising interest rates, debt ceiling part II, Ben Bernanke’s Federal Reserve successor, sequestration part II, Egypt, mid-term Congressional elections, and other natural and artificial disasters.
Despite a tsunami of unrelenting worries, the fact remains that corporate profits are at record levels (see chart below), corporations are holding record levels of cash, and even with a weak performance by stocks in August, the market is still up +15% this year, only off all-time record highs.
| Source: Calafia Beach Pundit |
Notwithstanding the recent record levels, stock ownership is at 15-year lows (see Markets Soar and Investors Snore) and skepticism still reigns supreme. By the time the coast is clear, and confidence returns, the opportunities will be vastly diminished. For the overwhelming majority of Baby Boomers and younger retirees, the investing game will remain challenging.
Wear a Raincoat & Ignore Data
Rather than succumbing to fears arising from volatile data and gloomy predictions, it is better to grab an investment raincoat and ignore the data. Sticking to your long-term investment plan is paramount. Legendary investor Sir John Templeton encapsulated the relationship of emotions and stock prices perfectly when he stated, “Bull markets are born on pessimism and they grow on skepticism, mature on optimism, and die on euphoria.” Fellow investor extraordinaire Peter Lynch highlighted the irrelevance of tracking macroeconomic data by noting, “If you spend 13 minutes a year on economics, you’ve wasted 10 minutes.”
When describing investment success, Lynch went on to say, “Whatever method you use to pick stocks or stock mutual funds, your ultimate success or failure will depend on your ability to ignore the worries of the world long enough to allow your investments to succeed.”
We’ve all survived the 100-year flood of 2008-09 with our lives, but confidence has been beaten down with the subsequent list of scary, misplaced forecasted floods over the last four years. Patient, long-term investors have been handsomely rewarded, with approximately +150% returns in stocks from the lows, but ominous economic predictions will persist. While the next 100-year flood probably won’t be here for another generation, disastrous forecasts will continue. As I’ve pointed out earlier, there is no shortage of concerns. There is always something horrible going on in this world somewhere and there will always be something to worry about. Who knows, tomorrow could bring an earthquake, terrorist attack, Russian currency crisis, Iranian regime change, Zimbabwean hyperinflation, or some other unforeseen concern.
There will be plenty of economic thunderstorms and showers ahead, but hiding in inflation eroding cash, or attempting to time the market is a recipe for financial disaster. Volatility is here to stay, so that’s why it’s so important to have a disciplined investment plan in place. Creating a globally diversified portfolio, across numerous asset classes, to smoothen volatility in a manner that meets your time horizon and risk tolerance is critical. Do yourself a favor and have your grandchildren (not you) worry about the next 100-year flood…that way you can ignore the multitude of phantom, 100-day floods.
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