By: Brett Fingerhut
By: Brett Fingerhut, MBA
“The world is too risky, so we should just invest in developed US and European stocks, right…?” Well, if there were any previous doubts that world events and crises are unpredictable and affect markets in both developed and undeveloped countries, then 2011 can surely put those concerns to rest. Whether it was Libya’s civil war and its effects on energy prices, earthquakes and nuclear meltdowns in Japan, political gridlock in Washington, or the European debt crisis and subsequent austerity measures, economic shocks will happen and they are difficult, if not impossible, to predict.
“But we know where the world growth will be, so why not just invest in those countries?” It’s actually much more complicated than that. Only hindsight is 20/20. Just a few short months ago we heard how well Germany’s economy was doing, despite fears of a global slowdown and debt crisis. So where did that very ugly third quarter in Germany’s DAX and other related European markets come from? With the complexities of the world today, it is extremely difficult to forecast where disruptions in world markets will appear.
However, valuable opportunities can come from different shocks and crises. This is why at Investor Solutions we continue to be strong proponents of investment rebalancing, tax-harvesting, and long-term investing in global markets.
Dealing With and Accepting Monetary Policy Intervention
Whether you are in favor of it or not, as long as Mr. Ben Bernanke continues to head the Federal Reserve, market intervention is here to stay. As investors, we have to learn to accept it and not move away from our long-term plans because of it. Mr. Bernanke’s November 21, 2002, speech to the National Economist Club, “Deflation: Making Sure ‘It’ Doesn’t Happen Here,” explains the concept of market intervention. In the speech, Mr. Bernanke emphasizes that, in his view, inflation is preferable to any severe deflation and that the Fed must have the will to use all the tools necessary to prevent such deflation. What are the implications of this speech for the average investor?
The implications for investors are twofold. First, depending on your time horizon, you should have sufficient exposure to equities to ensure that if monetary policy does create inflation, your real wealth can keep up with that inflation and continue to grow. Second, trying to time the market may cause you to “drop the ball” if you don’t accurately account for monetary market intervention. This makes staying invested and maintaining a well-diversified global portfolio of stocks and bonds even more important in today’s policy landscape.
Be a Better Investor: Spend More Time Enjoying Life and Less Time Reading the Paper…
While it is important to stay up to date with current economic affairs, it is critical to remember how the media money machine works. The media’s goal is to keep us glued to the story by scaring the daylights out of us! I’m still waiting for the day CNBC has the headline “Stocks and Bonds Fairly Priced. Markets Should Move Slowly.” Right…. So stand back, read critically, and remember to take the long view.
Google has an impressive archive of newspaper and magazine headlines going back decades. If you go back in time, you will find that Armageddon headlines appear at all great buying opportunities. Should this time period have been any different? I wouldn’t bet on it.
So instead of worrying about the unknowns, stick with your long-term plan. Be well balanced to reduce volatility, but learn to train your brain like a muscle to prepare for the ups and downs that are sure to occur. As Frank Armstrong, CEO and Founder of Investor Solution always emphasizes, rashly made decisions during times of volatility are a surefire way to ruin your chances of long-term prosperity and independence.
Get your Children and Grandchildren Involved Today for Life-long Investing
This market provides the next generation of your family with invaluable opportunities to invest both for long-term financial stability and for the learning experiences that will guide both new and young investors into a habit of life-long investing. Simply reading books and learning the history of investing in global markets is not enough. Experiencing the emotions that stem from the intricacies of different market cycles will educate your children and grandchildren to be more stable during market volatility and will lead them to be more financially responsible and goal-oriented.
Therefore, give the next generation reason to become involved, to get educated, and to gain an early start on financial success. Global equity valuations appear very attractive for someone with decades of time for investing. Talk to your Investor Solutions financial professional about how to get the next generation involved today.