Predicting the Stock Market
I am often asked for my thoughts on the prospects of the stock market. This question has become even more common given the tremendous declines and rebounds that we have witnessed over the recent past.
Without a doubt, market rebounds are welcome news. It is reassuring to open your account statements and see that your investments have regained some of their value. However, after the gut-wrenching losses of the last year, one cannot help but wonder what the future holds.
At the risk of sounding like a broken record, my answer is always the same. There will almost certainly be large declines again in the future – that is just what markets do. As I’ve said many times, if financial “experts” could accurately predict market swings, they’d be sitting on a beach with a laptop and not in front of a television camera pretending to know the future.
The natural reaction of investors is to feel frightened when the market declines and to be happy when the market increases. This cycle is often referred to as the investor psychology of “fear” and “greed.” Giving in to these emotions (buying high and selling low) will virtually guarantee poor investment returns. In my opinion, understanding the behavior of the markets and not making changes to your portfolio based on short-term market movements will give you the best chance of achieving favorable long-term returns.
The short answer is that no, I don’t try to predict short-term behavior of the market. Having said that, I am cautiously optimistic that the long-term trend will be upward. My best advice for having the best chances of achieving good long-term investment results for your investments is to:
1. Have a portfolio that has an “asset allocation” with which you feel comfortable. This means having the right mix of stocks (volatile, but having growth potential) and bonds (generally more stable, but less growth potential).
2. Have a portfolio that is well diversified. In simple terms, this means owning enough different individual stocks and bonds that a decline in any single individual company won’t significantly affect your performance.
3. Keep your investment costs as low as possible. High expense ratios and commissions are a huge drag on your long-term returns.
4. Always be aware of taxes. Make the most of tax-advantaged accounts whenever possible. When choosing investments for taxable accounts, make sure that they are as tax-efficient as possible.
5. Don’t be afraid to keep your situation as simple as possible. Complexity is no guarantee of success. It very often only adds costs and makes your portfolio much more difficult to manage.
What We All Can Do
The reason I am optimistic is that I feel confident that we have the power to get our country back on a strong financial footing. There are three things we all can do to help us get there:
- Get your own personal financial house in order. Earn, live, spend and invest wisely and responsibly (see above).
- Learn about and help resolve our country’s financial problems. The best place to start is to watch a documentary titled “I.O.U.S.A.”. A 30-minute mini clip can be viewed for free at www.PGPF.org. Use the information in the movie to evaluate the positions of political candidates and make appropriate choices. We need leaders that are capable of making the tough choices that need to be made about taxes, spending and debt. Any politician (Republican or Democrat) that says there are easy answers should be disregarded immediately. There are fairly simple answers – they just aren’t easy. For example, Social Security and Medicare are by far our biggest problems but can be fixed by increasing taxes, increasing the retirement age and decreasing benefits. Any solution that does not include all of these simply won’t work. Don’t punish a candidate or leader that admits the truth and undertakes the necessary actions.
- Learn about the FairTax (www.fairtax.org). It is the single best proposal to get our country back on the right path. We can argue about whether taxes and spending should be higher or lower, but there should be no argument over whether taxes should be fair and transparent, versus onerous and complex. The FairTax is neither a tax increase nor a tax decrease. It simply replaces our current income tax system (over 60,000 pages) with a very simple and fair national retail sales tax. It has built in provisions to protect the poor and middle class while making sure that the wealthy pay their fair share of taxes.