This year will go down in the record books as one of the best years to be a journalist. It seems like you can’t go more than 15 minutes without hearing some new headline that throws everyone for a loop. One simple tweet and the entire market goes into panic mode.
What I wanted to do with the article, is to highlight most of the noise blocking investors from what’s really important. Whether you want to blame politics, economics, the Federal Reserve, or business leaders, it’s all just diverting your attention away from your own personal finances.
Let’s start with a quick snapshot of some major news headlines from this past year.
Major Events in 2018:
- US/China Trade War tension
- Federal Reserve raising interest rates
- Flattening and inverting of the yield curve
- Stock market volatility returns
- Facebook-Cambridge Analytica data scandal
- Bitcoin – major rise in 2017, followed by a crash in 2018
- Marijuana companies become the next hype stocks
- Johnson & Johnson’s baby powder has asbestos?
- Robinhood jumps into banking…for a minute
- Elon Musk’s erratic behavior
- Huawei’s CFO arrested in Canada
- Stocks enter Bear Market territory
- Sears files for bankruptcy
- The fall of General Electric
In 2018, we also lost two of the most iconic and influential people of our time, Stephen Hawkins and Stan Lee. Between the two of them, science and science fiction have both been dealt major blows.
Next, let’s look at some data points from 2018:
Stock Market Returns (YTD as of this post):
|S&P 500 Index||-11.99%|
|Dow Jones Industrial Average||-11.47%|
|Barclays Aggregate Bond Index||0.34%|
|FTSE 100 (Europe)||-12.27%|
Source: Morningstar I plan to update these numbers post 12/31
US Economic Data:
GDP: The US Economy grew at 3.4% in the 3rd quarter of 2018. Some slight reductions in global growth due to early tariffs from China but, nonetheless, we still see positive economic growth in the United States.
Inflation: Inflation is on the rise…but really only since 2015. We are still at historically low levels of inflation. Prior to 2008, we saw inflation run at a rate above 4%. We are still way below normalized levels of inflation. Most people confuse rising inflation with a sign of a recession. But, if we look historically, we are still very low relative to prior years.
Unemployment: People not working is a pretty good indicator the economy is struggling. But if we look at our current unemployment rate, we are sub-4% unemployment. That means 96% of people in your community are going to work each day. That’s a lot of people contributing to a healthy and growing economy. Could tariffs and trade wars impact this? Sure, but right now, the data looks good, indicating that we have a strong workforce.
Corporate Profits: Business owners are a large portion of what drives the economy forward. As individual businesses become more profitable, they reward their shareholders, employees, and their communities. When we talk about the “Stock Market”, we are referring to the pulse of businesses across the globe. And in the US, we are continuously hitting record levels of corporate profits.
In summary, the US Economy is really in good shape. The Federal Reserve is working to raise interest rates for this exact reason. A healthy economy shouldn’t sit at such low-interest rates forever.
Companies are more profitable than ever, more people are working, and inflation really isn’t a big issue at this point. We can debate the economics all day but my point here is things are not as bad as the media makes them out to be.
So what the does any of this have to do with you? Absolutely nothing.
News happens, life happens, and the economic and political landscape will continuously change. How quickly you are able to shift your attention back to what’s actually important is what defines good investors. 2018 should have been a year you spent focusing on your family, personal finances, career development. If it was anything else, you need to readjust your thinking.
For most all investor, the gyrations in the stock market are nothing more than noise. A speed bump between today and whatever goal lies ahead. Spending your time worrying about the ups and downs in the market is only going to increase your stress levels. Instead, plan for future vacations, create a real budget, or use periods like today to really ask yourself if you are comfortable with your current portfolio.
There is a common term known as the “Behavior Gap” within the investment community. What it simply means is that most investors will underperform the investments they own, simply due to bad behavior. Selling when the market is low, and buying when the market is high.
Think about this for a second. Underperforming the investments you actually own. This means you are emotionally making decisions to jump in and out of the market at the wrong time and missing the total return some fund/stock/portfolio provides.
If you look at the illustration below, which term best describes how you feel about the markets today? My guess is, based on this years market, desperation and panic are probably setting in full force.
At the end of the day, markets are erratic at best. Everyone know’s the market will get volatile at some point, yet no investors want to comfortably sit through it. A negative return in a calendar year is actually quite common. In fact, it’s happened 24 times since 1928!
I like to think of it like hurricanes in Florida. EVERYONE in Florida knows we will have hurricanes. Yet, instead of appropriately planning ahead of time, we wait until the last minute and all rush the hardware stores and gas stations like maniacs.
Instead, prepare for volatile periods. Plan today as you would for tomorrow. Your investment allocation doesn’t need to be readjusted each and every time market volatility shows itself. By properly taking time to make sure your portfolio can weather storms like today, you can alleviate a lot of stress and help close the behavior gap!