By Joe Smalley, Accredited Investment Fiduciary®
*Note that there are 21 hyperlinks in this newsletter to stories on the various topics. Feel free to check them out.
Change is in the air. The leaves are beginning to turn color. School has started. Football is in full force. (Don’t get me started on the Spartans.) Baseball has started the playoffs. (Don’t get me started on the Tigers.) Oh, did someone mention a presidential election? (Don’t get me started on the election.) But change is definitely in the air.
And there is change around the world, as well. China is a growing world power. Russia’s plans are always cryptic and of concern. There is tension again in Kashmir, and also on the Korean peninsula. But perhaps most importantly, the war in Syria continues to impact the entire world as migrants are fleeing in large numbers. Europe has been struggling to climb out of recession, and now with immigration issues, Brexit, and German banks teetering, change seems to be in the air all over the globe.
And while there always seems to be something going on overseas that is of concern to the stock market, now all eyes are on the United States.
Of course, the presidential election is the first thing on everyone’s mind – not just investors. But instead of getting into the politics of it, let’s look at it from an investor’s perspective.
Mostly, it doesn’t matter who wins the White House. Historically, the stock market moves on the economy, more than on politics. And the Federal Reserve has a large impact on interest rates, which impacts the economy. Because the markets tend to be tied to the economy, the stock market tends to do better during economic expansions. It just so happens that historically, that has been when a Democrat was in the White House. Other studies show that the market does better when there is divided government. You may be tempted to sit this election out. I get it. But remember that not everyone has the privilege to cast a vote for their leaders.
But stocks, in a perfect world, move on fundamentals. On earnings. On sales. If a company sells more widgets, their stock tends to go up. If they sell less, it goes down. Right now, corporate earnings are declining. But the stock market is at or near it’s all-time high. There is a disconnect between earnings and the stock prices.
So what is an investor to do? According to some studies, the economy follows presidential cycles, and therefore can be timed. Now, the study suggests, is a time of decline. According to their theory, the best time to invest is the second year of a new president’s term.
The thing is, timing the market is difficult.
So here’s the key: know your time horizon. Invest accordingly. If you need money in the next 2 years, you should probably keep it in cash. Bonds are good for income. Stocks for growth. But stocks are volatile and should only be invested if you have a long time until your goal. And a diversified portfolio is key. That old saying “don’t put all of your eggs in one basket” comes to mind.
But if you have a diversified portfolio, you may be less than satisfied with returns recently. That’s because several asset classes have been hit rather hard in the past 18 months – emerging markets come to mind – and their losses have erased the gains in the other asset classes.
Don’t get too discouraged. And don’t pull out or make big changes because returns are a bit flat. You don’t pull up your carrots to check to see if they are growing.
Similarly, the best time to invest is when you have the money to invest. Do yourself a favor: invest on a monthly basis. Do it. Get in the habit and save and invest each and every month. When you can, increase the amount you put away. Seriously, if you don’t do anything else I tell you to, do this. Compounded interest is so important.
Like a relief pitcher, resolve, perseverance and a short memory will serve you well as an investor.
Here is an appropriate quote from the famous investor Warren Buffet: “I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for five years.” That seems like a good way to think about long-term investing.
So, as we roll into the fall, change is upon us. The Spartans will hopefully find their way to a bowl game this year. The Tigers will get some much needed rest. And the election will soon be over.
Fall is a good time to review your investments to make sure that they are aligned with your goals. I’m not sure it makes a lot of sense to change your long-term asset allocation unless your situation has changed. Of course, if you have any questions or would like to talk things through, please give us a call.
And remember this pearl of wisdom from Franklin D. Roosevelt: “Nobody will ever deprive the American people of the right to vote except the American people themselves, and the only way they could do this is by not voting.”
Hold your nose if you have to, but please vote in November.
Diversification does not assure a profit or protect against loss in declining markets, and diversification cannot guarantee that any objective or goal will be achieved.
Systematic investment plans do not assure a profit or protect against loss in declining markets.
Emerging market investments may involve higher risks than investments from developed countries and also involve increased risks due to differences in accounting methods, foreign taxation, political instability, and currency fluctuation.
Investments are subject to risk, including the loss of principal. Because investment return and principal value fluctuate, shares may be worth more or less than their original value. Some investments are not suitable for all investors, and there is no guarantee that any investing goal will be met. Past performance is no guarantee of future results. Talk to your financial advisor before making any investing decisions.
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