Sure go head and choose the trending colors on Pinterest or go to the latest blockbuster movie. Even check out the trendiest resto in town. But please don’t apply that popularity concept to your investments.
Further to my last blog post let’s take a deeper dive into the workings of the stock market.
This blog post was prompted by 2 client conversations. The theme of both those chats was the fear of missing out on recent stock market highs. They were asking me to make their portfolios more aggressive.
First of all: Neither you or I can repeatedly be successful in the stock market on our own. We don’t have the time, resources, professional staff, expertise, and inside connections to the knowledge needed. That is why we hire professionals. The media perpetuates the myth that an individual can be successful in the stock market. Maybe only once in awhile. Yes I am part of the financial world but I only get a glimpse of the inner workings.
Secondly don’t equate the stock market and the economy. The 2 are connected but separate. Just because the stock market is doing well doesn’t mean the economy is. Recall I said that part of stock market activity is based on sentiment and beliefs.
Unfortunately stock market cycles are very predictable because participants repeat their mistakes over and over. Last year’s winners are usually the current year’s losers. And I would rather explain to you why your 6-8 % return is sufficient rather than try to console you when your return is negative 20%. Remember the earlier you start investing the better advantage you can take of the ups and downs.
Which brings me to an article I read in one of my professional magazines. Research shows that eliminating the worst AND best days will give the investor a higher return than trying to hit a home run by investing in the hottest stocks.(1) This confirms what very qualified expert investment managers have been practicing for years. Consistency of returns and process is of paramount importance.
The current stock market is overvalued and overheated with speculation built in. Current monetary policy(some experts go so far as to say dishonest monetary policy) is built on a kick the can down the road mentality. Building a’ great’ stock market by mortgaging the future of the upcoming generation is a fragile policy at best.
Remember the higher the potential gain the greater the risk will be. The higher the potential gain the bigger the potential loss. My job is to find that happy medium and to monitor your accounts. Your job is to patiently stay the course and not participate in the herd mentality. As a team we will progress towards achieving your life goals
1. Stacking the Deck: How maintaining consistent risk levels avoid large declines. Advisor’s Edge February 2018