Focus on your plan, not the headlines
When someone asks me what's going to happen with a major indicator — say, interest rates — in the coming months, my typical response is something like this: "If I knew, I wouldn't be working. I'd be on my own private island in the Pacific."
So it goes in the mercurial world of securities investing. Sure, economics may be interesting and helpful in some areas, but not necessarily in the world of successful investing. This field, as evidenced by its dismal track record, is better suited to looking back and figuring out what has happened than it is at looking forward to figure out what will happen.
But most people mistakenly persist in viewing the current economy as a sure sign of what will happen in investment markets.
For example, the U.S. markets did great in 2010, while the economy that year was barely creeping out of recession. That same year, the economies of China and Brazil were growing like gangbusters, but their stock markets were performing poorly.
This year, the S&P 500 has recently surged above 1,425 — its highest peak since May 2008, before everything came tumbling down. Few Wall Street firms or advisers saw this year's market coming, forecasting S&P gains of only about 6 percent.
As of this writing, the S&P is up more than 14 percent year to date. However, with this index having gone up or down as much as 2 percent in one day on multiple occasions, the market this year has been one of the most volatile in history.
Though gains always feel good, volatility for some is bad, because while most people benefit from S&P gains, volatility can punish portfolios selectively, especially if they aren't adequately diversified — spread out over enough different asset classes that a decline in one doesn't ruin you. This is the investment equivalent of the homily, "Don't keep all your eggs in one basket."
Thus far, projections by speculators for 2012, not surprisingly, haven't matched reality, because they were influenced by economic and fiscal headlines that were anything but optimistic: the continued slow crawl of the U.S. economy; the drought in the U.S. that's raising food prices; the chances that Iran might disrupt oil supply lines; the vexing debt crisis in Europe, the biggest consumer of American exports; slowing economic growth in India, Brazil and China; the U.S. fiscal cliff (the expiration of various tax cuts, which could potentially lead to more credit downgrades that might increase the interest the government pays on its bonds — which, in turn, could increase the deficit even more).
Along with the surprisingly good performance of the U.S. markets this year, international stocks have also done much better than expected, despite all the factors that would seem to dictate the opposite. Think Europe.
Global returns for various asset classes have naysaying Wall Street firms shaking their heads over what was supposed to be a lackluster year. Some passive funds of Dimensional Fund Advisors (DFA) that hold specific asset classes show astonishing performance for a world in which many financially dominant countries are beset by shrinking gross domestic product figures and fiscal disarray.
DFA's U.S. large-cap and large-cap value funds had returned more than 14 percent for the year, respectively, as of August. As of that time, the firm's U.S. real estate fund had returned a whopping 16-plus percent for the year; its U.S. small-cap fund, nearly 13 percent; and its U.S. small-cap value fund, more than 11 percent.
Also as of August, DFA's emerging-markets fund had returned about 9 percent (a big improvement over 2011), and its international small-cap value fund, a respectable 8 percent.
What's the moral of this story? It's that there's simply no way to know in advance how the markets will do. You shouldn't ignore headlines, but don't allow them to affect how, and when, you invest.
The global investment markets are extremely complex, but price in all known information before it hits the headlines. Thus, attempting to figure out what's going to happen in terms of rising and falling securities is next to impossible. The wisest course is to have an adequately diversified portfolio so you can weather storms. And remember: Don't take anyone's weather forecast as gospel.
Tim Decker, a fee-only financial planner, is president of ISI Financial Group in Lancaster. He is the author of "The Sleep-Well-At-Night Investor" and host of the radio program "Financial Freedom," which airs at noon Saturdays on WHP-AM 580. Contact him at www.isifinancialgroup.com.
This content is based upon information believed to be accurate by ISI Financial Group, Inc. However, it should not be relied upon for legal or accounting purposes. Past performance is not indicative of future performance. Investments involve risk, including the possible loss of principal. Always seek professional advice before making any financial or legal decisions.