What do I want to accomplish and what is the possibility of success?
OBJECTIVES: Answers the question, “What do I want as a result of investing”?
- I want my investment money to be safe, and/or
- I want my investment money to grow.
How do you reconcile the two objectives?
Begin by asking: Do I know which investment markets will gain (or lose) value tomorrow? Next Month? By the end of the year? The coming twelve months?
The answer to these questions provides information about what to buy and sell. In which order. And, when.
SO, there you have it. The formula for investment success beyond imagination. Now I will tell you who has perfect investment insight. The name is….No One.
POSSIBILITIES: From best to worst what can happen to my money?
When it comes to the investment, financial, economic future there are four possibilities. In non-technical terms they are:
- Muddling Through.
- Near Destruction.
Let’s look briefly at each possibility.
- UTOPIA. Demonstrated by continuing increases in stock and bond market values. Reasonable interest rates providing a live able income. Small but stable cost of living. Bipartisan political decisions. Limited international tensions. Negligible risk to loss of investment principal.
Emotional attitude: “What me worry?”
How to Invest: Blindfolded, throw darts at the stocks section of a newspaper and put your money on whatever sticks. If you don’t trust your throwing, have a monkey do it for you. (I am not volunteering).
- MUDDLING THROUGH. Demonstrated by Stock values varying greatly among asset classes. Economic uncertainties accentuated by changing calculations of formulas, divergent views by respected authorities, and political partisanship. Interest rates slowly increasing (unless economic data indicates growing weakness, but perhaps not, let’s see what happens tomorrow). High debt levels personally, in some states, and nationally. Business valuations and profits vary from OK to doing very well. Taxes, taxes, taxes, will be reduced and simplified (when we can arrive at a political agreement.) Take your choice of being optimistic or pessimistic about the future.
Emotional attitude: Confused, hoping for the best but not confident.
How to Invest: The dilemma is managed, but not resolved, by using asset allocation. The broad designation of assets are stocks, bonds, and cash. Each asset area is comprised of smaller designations. Stocks may be viewed as large, small, and microcap in size. They may also be companies owned in the USA or foreign countries. They may be recently available for investment by investors or have been around for generations. Their objective may be to grow as rapidly as possible or to share profits with investors as dividend distributions. Bonds exist in similar focused areas. Even Cash is not as simple as might be thought.
- NEAR DESTRUCTION. Demonstrated by prices of stocks declining sharply, losing forty percent and more in value. Some types of bonds also lose significantly. Growth, small company, and new or highly speculative stocks lose the most. Investors relying on withdrawals to fund retirement or credit payments to banks for housing or automobiles purchases risk compromising future plans.
Price declines of ten to twenty percent commonly occur each four or five years. These declines are a nuisance but generally recover in a short time. The destructive declines are such as occurred in 2000 to 2004 and 2007 to 2009.
OBSERVATION: Follow this line of information. The Gross Domestic Product is the value of all goods and services produced in the USA. The Wilshire 5000 is an index of 5000 USA traded stocks (the total stock market). From the mid-1970’s to mid-1990’s the value ratio was between 40% to 60%. The ratio in 1999 had risen to 135%. The stock market began declining beginning in 2000. By 2004 the ratio was 70%. The markets began to rise again. By 2007 the ratio was at 105%. The market began to decline. By 2009 the ratio was at 60%. Stock markets bottomed and we are still experiencing the rise. So what? The ratio is now at 120%.
Does this mean we are due for another bone chilling, life altering loss of 40%- 60%? Based upon this one method of evaluation the answer indicates a strong possibility of it happening. The unknown is the question of when. Does anyone believe a loss of this magnitude will never happen again?
Emotional attitude. Difficulty in deciding what is your primary investment objective. Safety or Growth? Be cautious.
How to Invest. Focus on large, well established dividend paying companies. Stocks will lose value but the expectation is it will be less than usual DJIA and S&P 500 index market averages. In a 40%-50% general market decline it may be expected these accounts may lose 20%-25% in value. To reduce the possibility of this much decline the percentage invested in stocks needs to be reduced and additional money moved to bonds and cash.
- Depression. What do the dates 1807-1814; 1837-1844; 1873-1879; 1893-1898; and 1929-1941 have in common? They are dates of past economic depressions in the US. From September 1929 to July 1932 the DJIA fell 89%. Recovery took until 1941. This most recent decline ended 76 years ago. The average time between other depressions was 25-30 years. Looks like we have solved the depression problem. Have we? Or, have we managed to avoid the inevitable for this long?
Emotional Attitude. Depression. Shock. Disbelief. Anger. Misplaced Blame.
How to Invest. Must be done prior to an occurrence. No one investment allocation or strategy can guarantee total protection. Remember not everyone went broke in the 1929 -1932 time. The objective is to lose less in relation to everyone else. Consider a combination of large dividend paying stocks, bonds, cash, gold and real estate.
The Decision Point.
The choice is yours. Do you focus on growth and expect utopia? Or do you moderate expectations and invest for muddling through? Will it be more “sleep well at night” comfortable to protect principal by being even more conservative? Do you look at all the international and national turmoil and question how much longer we can survive?
Care to answer and tell share your thoughts?