March 29, 2024

Bucks: Investment Plans and Forecasts Don’t Mix

Carl Richards is a certified financial planner in Park City, Utah, and is the director of investor education at the BAM Alliance. His book, “The Behavior Gap,” was published this year. His sketches are archived on the Bucks blog.

“I know you can’t time the market. But in your view, where is the market going?”

I still get this question from people, at event after event, even after people have heard me talk about the importance of behavior and how we can’t predict short-term market performance.

During a recent trip to South Africa, I got even more specific questions:

  • Where is the United States economy headed?
  • Where are interest rates headed?
  • Is now a good time to invest in Japan?
  • Is the housing recovery for real?

Here’s the thing: I totally understand why people are asking questions about timing. First, there’s an assumption that having an opinion — whether it’s about the market, the economy, or Japan — makes someone look smart. Being able to talk about these subjects must mean you have more money and your investments do better, right?

Not true.

Second, if you don’t talk about sports or politics that only leaves economic issues (Again, not true. It just feels that way). Now maybe you like to talk about all three, but it’s reached the point where talking about the economy and markets is an official spectator sport. We all feel capable of playing.

And while it may be fun to chat about what the market might do next at your neighborhood barbeque, don’t kid yourself. What we know about the market comes down to a bunch of guesses, also known as forecasts.

Forecasts about the future of the market are very likely to be wrong, and we don’t know by how much and in which direction. So why would we use these guesses to make incredibly important decisions about our money?

That’s right. You shouldn’t because you know better, and relying on what’s really just a hunch is an all but guaranteed recipe for financial pain.

Instead of relying on guesses to dictate our financial decisions, we need to focus on the investing basics:

    • Figure out where you are today
    • Make a guess about where you want to go
    • Buy diversified, low-cost investments that have the best shot of getting there
    • Behave for a long time

Obviously, this list isn’t nearly as interesting as speculating about whether the Dow will break 16,000 before the end of the year. But it is a list that will keep you from doing something dumb, like thinking it’s a good idea to bet your portfolio on a guess.

So, just in case I’ve left you in doubt, please don’t forget: Plans and guesses don’t mix!

Article source: http://bucks.blogs.nytimes.com/2013/07/01/investment-plans-and-forecasts-dont-mix/?partner=rss&emc=rss

Bucks: The Question You Should Be Asking About the Stock Market

Carl Richards

Carl Richards is a financial planner in Park City, Utah, and is the director of investor education at the BAM Alliance. His book, “The Behavior Gap,” was published last year. His sketches are archived on the Bucks blog.

With the stock market up more than 100 percent from those scary days in early 2009 and up 16 percent in 2012 alone, we’re now hearing plenty about how small investors are getting back into the market. Andrew Wilkinson, the chief economic strategist at Miller Tabak Associates, referred to it as a “a real sea change in investor outlook.”

It seems we’re in danger of repeating the same old cycle of swearing off stocks forever during scary markets, missing a huge rally and then deciding it’s time to buy when stocks are high again. On the flip side, I’ve had a number of conversations with Main Street investors who are asking if now is the time to sell because the Dow Jones Industrial Average is hovering near 14,000 and the SP 500 stock index is around 1,500 again.

So which one is it? Should everyday investors be buying or selling?

Do you see the problem here?

If we’re investing based on what the market has done, it’s a recipe for disaster. Recent market performance tells us almost nothing useful about what the market will do in the near future. Logically it seems like it should, but a quick review of the market’s performance during the last six years should be evidence enough to convince us that it doesn’t.

Remember how you felt in March, 2009? I bet you didn’t feel like investing, and you weren’t alone. Almost no one did. It was a scary time. But it turns out that it would have been a brilliant time to invest. Again, not because of what the market had done, but what it was about to do.

But there was no way to know that in March 2009.

Did anyone expect (or feel) like 2012 was going to turn into a 16 percent year? In fact, almost all the unfortunate souls that make their living predicting the markets got 2012 wrong.

Here’s the thing we need to remember: we have no idea if now is the time to be buying or selling. But the good news is that it’s not even the question we should be asking. Instead we should be asking, “How can we avoid making the big behavioral mistake of selling low and buying high (again!) in the future?”

Instead of worrying about getting in or out of the market at the right time, take that time to focus on crafting a portfolio based on your goals. Start by taking out a piece of paper and writing a personal investment policy statement that addresses the following:

  1. Why are you investing this money in the first place? What are your goals?
  2. How much do you need in cash, bonds and stocks to give you the best chance of meeting those goals while taking the least amount of risk?
  3. What actual investments will you buy to populate that plan and why? Make sure you address issues like diversification and expenses.
  4. How often will you revisit this plan to make sure you’re doing what you said you would do and to make changes to your investments to get them back in line with what you said in number 2?

A personal investment policy statement can be one of the most important guardrails against the emotional investment decisions that we all regret in hindsight. So, when you get worried about the markets and are tempted to sell everything you own that has anything to do with stocks, go back to that piece of paper. If your goals haven’t changed, forget about it.

And when you get excited about that initial public offering that your brother-in-law says he can “get you in on,” pull out that piece of paper. If your goals haven’t changed, forget about it.

When your neighbors are all wrapped up in how the latest apocalypse du jour is going to ruin everyone’s retirement, pull out that piece of paper. If your goals haven’t changed, forget about it.

I know this might not work all the time. In fact, it might not work at all when we’re scared and dead set on getting out. But my hope is that having something we wrote when we weren’t scared will give us a little time to pause and ask a few questions before we do something that might end up being a mistake.

As a result, maybe, just maybe, we can shift the focus away from whether now is the right time to buy or sell and place it squarely on whether that decision fits into our own, personal investment plans.

 

Article source: http://bucks.blogs.nytimes.com/2013/02/04/the-question-you-should-be-asking-about-the-stock-market/?partner=rss&emc=rss

American Stock Markets End 2011 Where They Started

The Standard Poor’s 500-stock index, the main gauge of broad market performance, closed on Friday at 1,257.60, finishing the year nearly dead even with its 2010 close of 1,257.64, which is technically down 0.003 percent. The Dow Jones industrial average of 30 blue-chip American stocks fared better, closing the year with a 5.5 percent gain at 12,217.56.

Market strategists predict the S. P. will stay in a range of 1,100 to 1,500 by the end of 2012, depending on how investors balance economic growth, fiscal policy, corporate earnings and the European debt crisis, as well as the potential for change after the November election.

Yet, looking back at 2011, it was a flat finale that told little of the volatility preceding it, when political turmoil, financial upheaval and even natural disasters left almost no corner of the markets untouched.

On 35 trading days in the year, the broader market closed with a gain or loss of 2 percent or more — the most number of days of that magnitude since the financial crisis of 2008-9 and making 2011 among the most volatile on record for stocks.

“It has been such a difficult year,” said Rick Bensignor, the chief market strategist for Merlin Securities. “Things changed on a dime.”

Oil prices shot up to $114 a barrel before plunging to $76 and rising again to $100 in reaction to revolutions in the Middle East and North Africa. Investors piled into the perceived haven of United States Treasury bonds even after the nation’s credit rating suffered its first-ever downgrade. The earthquake and tsunami in Japan exacted a devastating human and economic toll.

And the debt crisis in Europe upended governments, stirred fears of sovereign defaults and imposed severe financing strains on banks. Possibilities that were once remote became questions for debate in 2011: Will the euro zone break up? Is this a replay of the 2008 financial crisis?

Sentiment was also hobbled by a deadlock in Washington over fiscal policy and by the potential for slowing growth in emerging markets.

“Investors are scared to death,” said Philip J. Orlando, a chief market strategist for Federated Investors. “You have a massive flight to safety.”

Despite the bruising it took in 2011, Wall Street managed to score one of the better global performances. Major European and Asian indexes lost anywhere from 6 percent (Britain) to 26 percent (Italy) for 2011.

Looking ahead, some analysts see the United States faring even better in 2012. Binky Chadha, the chief strategist for Deutsche Bank, who forecast that the S. P. 500 would end closer to 1,500 in 2012, wrote in a market commentary that “very healthy” corporate fundamentals and cheap valuations would help equities eventually win out over the euro crisis and American fiscal issues.

Some analysts said investors would most likely be better braced to handle policy changes in the nations that use the euro.

“Investor reaction should continue to get better,” said Jack A. Ablin, chief investment officer of Harris Private Bank. “For as lousy as Europe’s news is, it has got to be the slowest moving train wreck in the history of the financial world. It’s the stuff that comes over the transom that kills us.”

Among the best 2011 performers in the S. P. 500 were utilities, up 14.8 percent; health care, up 10.2 percent; and consumer staples, 10.5 percent. The financial sector fared the worst, finishing down 18.4 percent.

Macroeconomics ganged up on market sentiment this year to such an extent that investors backed off stocks even as American companies set records for profits, mostly via cost-cutting.

In the third quarter, for example, earnings per share for companies in the S. P. 500 were $25.29, their highest ever for a quarter, according to statistics compiled by Standard Poor’s. But in an “enormous disconnect,” said Howard Silverblatt, senior index analyst for S. P., the index was still down 14 percent in that period.

“The fundamental underpinnings of investing didn’t matter” in 2011, Mr. Ablin said. “All it took was one headline and just like a tidal wave, it was lapping across the market.”

Article source: http://feeds.nytimes.com/click.phdo?i=789d633eb685c1d515b5b4fbb619d585