By Joe Smalley, Accredited Investment Fiduciary®
Those of you who know me well understand that right now is a difficult time for my family and me; our beloved Detroit Tigers have lost back to back series; the longest tenured player, Brandon Inge, was released; five of our players are batting under .220; and our starting left fielder was just arrested in New York City. Things are looking dark and gloomy in the Motor City.
But if you look at the rest of the American League Central Division and compare the Tigers against the other clubs, the picture changes a bit. Detroit has the best pitcher in all of baseball. They just picked up the best hitting free agent on the planet. Even after a rough April, the Tigers are .500 for the year, and they are only a couple games out of first place.
Some of you have already tuned out because you think this is just a commentary on baseball. I can understand that, but I bring all of this up as an analogy to the world economy and to the stock market.
As we flip the calendar from April to May, the pain in Spain is reigning all over the news as the next European domino to fall under the weight of sovereign debt. And Spain’s problems make Greece’s problems seem small. Then there is Italy. And Portugal. And don’t forget Germany – the rich uncle who keeps forking over Euros and demanding austerity. Things are looking dark and gloomy in Euroland.
But if you look at the rest of the developed world, the picture changes a bit. Australia was the first First World country to recover after the financial collapse in 2008, and things remain strong there. Here in the United States, we have seen improving employment numbers over the past eighteen months, a rebounding housing market, strong corporate earnings, rising consumer sentiment, and even an economy that is growing. Compared to Europe, things here look pretty good.
It is easy to look at the standings of the American League to see which team is in first place, just as it is easy to look at the front page of the newspaper to see which market is doing best. But here is my reminder – it doesn’t matter who is in first place in May. Likewise, it doesn’t matter which market is up right now if your time horizon for your investments is not right now.
While the market noise in Europe, along with the election here in the U.S. will cause me to reduce my asset allocation to equities over the next six months, I am not suggesting moving everything to cash. Diversification is still important. So too are stocks that pay a healthy dividend. I like alternative asset classes, and would consider moving some of the portfolio in that direction.
But here is the key: timing the market is difficult and no one has ever proven to be good at it consistently. The best way I know to accomplish your long term goals is to stay invested for the long term. Below is a graph of investment returns from 1998 – 2008. It shows that the S&P 500 was up an average of 8.35% per year during that period. But the average stock fund investor was only up 1.87% during the same period. Do you know why there is such a big difference? Yep, the average investor got scared into selling their investments when the market went down. Remember that whole “buy low, sell high” thing? The average investor did just the opposite.
My advice is to put together a strategy for your investments based on your time horizon:
- · Short term money should be invested/saved in a vehicle that does not fluctuate much.
- · Medium term money should earn some interest.
- · Long term money should outpace inflation. (In the above chart, inflation averaged 2.89%per year.)
To discuss your financial goals and to create a strategy and asset allocation based on your time horizon, please give me a call. In the mean time, let’s hope the Tigers can turn things around. I’d sure like to see another pennant in Detroit this year.