Tuesday, August 9, 2011

As the Market Turns...

Market volatility can really mess with your head. Even now in the rubble of what is my second bear market as an investor, the talking heads, screaming news headlines, and red marks from the big boards can’t help but grab my attention. But it is in these times, as I do not expect this to be the last one I will ever see in my lifetime, that the basic fundamentals bring me solace during the downturn. These times are also important because they really bring to the forefront and highlight what should be responsible investing practices that I abide by. These include:

1.      Establishing a liquid emergency fund before investing a single penny
2.      Erasing debt from my life
3.      Investing for the long term

The last point is without question the most important and crucial to my wealth building game plan. Jumping in and out of the market through bull and bear markets leaves you open to getting your head ripped off, literally(I’ve personally never found bulls nor bears to play nice). Single companies can go bankrupt in good and bad economic environments (see debt is dumb). And trying to time the market, trust me, there aren’t enough spreadsheets in the world to cover the scenarios that can play out (and this coming from a certified nerd). Instead, which I will cover soon in an investing column, I opt for a diversification of mutual funds. Spread across domestic and international, small-medium and large companies, I expose my risk tolerance to a basket of funds with trusted and proven investment managers. How do I know they are trusted and proven? In searching for mutual funds, I have simple yet strict criteria for a fund to even make my list of consideration. The fund has to be at least 10 years old with an average annualized return of at least 12% since inception. Although for me the older the better, 10 years is a great gauge for bull and bear markets to play out and evaluate an investing team’s performance. For me, an aged mutual fund tells me that they have been through good and bad economic times before, expect to see them in the future, and hold a long term investing plan of growth, not swinging for the fences (which often times leaves you striking out).
But back to the market today. With the downgrade of the US government’s credit rating, a presidential administration unwilling to admit it’s spending problems and companies expecting to be below expectations for 3rd quarter reporting, our market is bullish and taken an exceptional downturn in the last week. With emphasis on the downgrading of the US government’s credit rating, these events will be considered in history to be a negative geopolitical event, causing an immediate downturn in the stock market. Brace yourself, because what I am about to say may shock, horrify and rock your world: Negative geopolitical events that negatively impact the stock market have happened in our past and will happen in the future. GASP!
September 11, 2001. The dot com bubble burst. The invasion of Iraq. Stagflation during the 1970s. The JFK assassination. The Cuban Missile Crisis. World War II. The bombing of Pearl Harbor. World War I. These are all examples of negative geopolitical events that knocked the wind out of the stock market for a period of time. What’s resulted historically is proof that the American economy is the greatest fighting machine to be created (American economy, not government spending. That is of course unless you’ve felt “stimulated” from QE I & II). With the exception of WWII, within one year to date of the negative event, the stock market returned as a whole to “pre-fall” levels within 365 days every time! After 9/11, it took one month for the market as a whole to return to where it was on 9/10. Tack onto this, that every 10 year period, including this past decade, has generated positive returns. Long term investing generates results, pulling money in and out with “sophisticated” tricks like short selling/options/futures will leave you heartbroken and with low returns over your investing lifetime that would be lucky to keep pace with inflation.
I cannot stress enough the importance of investing fundamentals: invest in quality mutual funds that have been through market waves and crashes before, invest in the long term and always see the bigger picture.

No comments:

Post a Comment