It’s getting pretty tough these days not to be at least a little depressed about our portfolios.
We’ve endured one of the worst decades in the history of the capital markets. The culmination of this 10-year market monsoon was the almost complete meltdown of world credit markets that occurred in late 2008 and early 2009.
While the markets may have been uncertain, however, one thing we could always count on was the steady barrage of newscasts covering every minute of the turmoil. Whenever markets are going down, you can be sure that the frenzy will be fed by endless analysis of the calamity.
There’s no doubt that it can be hard to ignore all the dire predictions, especially when it’s your hard-earned life savings that are on the line. But if you take a moment to step back and look at the track record of all the prognosticators, pundits and other “experts,” it quickly becomes clear that predicting the future is anything but a straightforward exercise.
The business of financial “news” is essentially a series of educated guesses, which are often based on extending the recent past into the distant future. The future, however, tends to do whatever it wants, regardless of our analysis of tendencies and trends.
“Hold on,” you might say – lots of experts correctly predicted the financial meltdown. That’s true. There were also many other, equally impressive people who predicted that the financial future held nothing but roses and sunshine. It’s only after the fact that it becomes clear which of these groups we should’ve listened to.
Right now, for example, I’m sure there are many people out there who are warning us that little green men are going to come down and take control of our brains before the year is out. I know I’m going to feel like an idiot if they turn out to be right. But that doesn’t mean I’m going to rush out and buy an aluminium foil hat.
For a more realistic example, just think back to Halloween of 2007. The S&P 500 sat at 1,576 points – about 50 per cent higher than it is today. But was anyone warning us about the imminent collapse of Bear Stearns, Lehman Brothers, Washington Mutual, Fannie Mae or Freddie Mac? Or the fact that, a few weeks later, the entire American financial system was going to become insolvent, followed shortly thereafter by most of the rest of the world?
In hindsight, it would have been extremely valuable if – on or about March 30, 2009 – we could have known that the U.S. Federal Reserve was going to restore liquidity to the financial markets, and cause the stock market to rally more than 80 per cent over the next 14 months. But the problem with trying to guess what’s going to happen tomorrow, is that we’ll never really know for sure until we get there.
So what kind of information should we rely on to make decisions about our portfolio, if we accept that no one can truly predict the future?
The best and most reliable source of information is what you know about yourself right now.
You know how old you are. You know your objectives, both financially and in life. You know how much money you have, what your expenses are and a whole host of other good and true things that can guide you towards making the right portfolio decisions.
A few other things you likely know: long-term investments are appropriate to long-term objectives, diversification reduces risk, and bonds are a good way to increase certainty over the shorter term.
We also know that stocks are by and large a pretty good long-term investment. Stocks went down 57 per cent in 2008-09, which is a very nasty short-term number. But the dividend yield on the S&P 500 has gone up by 5.6 per cent compounded since 1935. The key is keeping the long term and the short term in perspective, and in the right proportion.
Don’t get me wrong. Having the right portfolio mix can’t eliminate all the stress in your life or guarantee that the road ahead won’t have any bumps or traffic jams. But holding the right investments – and knowing why you are holding them – will help you stick with your plan, instead of sticking with the latest tealeaf reading on the six o’clock news.
Alan MacDonald is an investment advisor with Richardson GMP Limited. Alan helps investors with over $500,000. of assets make smart decisions about money. For more information please visit www.alanmacdonald.ca or email Alan at Alan.Macdonald@RichardsonGMP.com.
The opinions expressed in this report are the opinions of the author and readers should not assume they reflect the opinions or recommendations of Richardson GMP Limited or its affiliates.
Richardson GMP Limited, Member CIPF
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