“It is a tale told by an idiot, full of sound and fury, signifying nothing.”
— Macbeth, Act 5, Scene 5 by William Shakespeare
The “it” that Macbeth, King of Scotland, was/is referring to in Shakespeare’s play is life itself. I hope that neither you nor I are so jaded that we hold to that view, but the words do apply, methinks, to much of the news that comes our way each day.
The Brexit vote took place on June 23rd. That Friday, June 24th, the Dow Jones Industrial Average fell 610 points which comes in at eighth place in all-time single day DJIA drops. The following Monday came in at a 261 point drop. The news was rife with the eminent demise of the world, European, US, and particularly British economies.
Eleven days later, the Dow and the S&P 500 indices were trading at all-time highs.
Now let me say upfront that I am no expert on the implications of the United Kingdom’s vote to pull out on the European Union. But I also find that it is not just me. I did a ton of reading and listening in on conference calls on the subject. I found no conclusive arguments as to whether the impacts would be good or ill (or even significant) for the global economy or equity markets in any significant way. One group went so far as to say, “We see … uncertainty.” Really? Uncertainty? In stock markets? Who knew?
So this begs the question: “What do we do as investors when there is momentous financial news?” First, we have to decide if the news is “momentous”, and the answer is often, but not always no. Sometimes, if we get a 1000(ish) point drop in the DOW (like we did after Brexit), we can find a quick buying opportunity. But we should remember that quick is dangerous, slow and steady is the ticket to financial success. Here’s how Charlie Munger of Berkshire Hathaway describes their approach:
“It is remarkable how much long term advantage people like us have gotten by trying to be consistently not stupid, instead of trying to be very intelligent.” — Charlie Munger
So keep a long-term perspective, but be willing to take tactical advantage of current events. As I write today, with equity markets at all-time highs, economic growth anemic all across the world, and bond yields at 40 to fifty year lows, it makes sense for you to move to the more conservative end of your risk tolerance spectrum, but it doesn’t make sense for you to sell on any given panic-inducing news event.
Remember to use your well-thought-out investment plan to guide you, not your emotions. If your emotions are keeping you up at night, by all means, go ahead and rethink your plan and approach. Here’s one last quote from an investment pro of years ago:
“The market does not beat them. They beat themselves because though they have brains, they cannot sit tight.” – Jesse Livermore
Stay strong and keep the faith. We’ll talk next month.
Well, okay then. I hear you. You want an answer re: “How should I invest my retirement account?”
First, however I must offer the required disclaimer lest I run afoul of securities laws and regulations. I cannot and do not offer investment advice for anyone without discussing both their particular financial situation and goals, and determining the suitability of any investment recommendation.
That said, when we fund our IRAs, we generally have four main categories to consider: stocks, bonds, cash and what are now being grouped into “alternative investments”. Alternative investments include things like Real Estate Investment Trusts (REITS), commodities, managed futures and the ilk. We will leave that topic for another day.
The bulk of what your IRA should probably consist of stocks and bonds. Note the word “probably”. While I don’t wish to be mealy mouthed, I can’t emphasize strongly enough that portfolios should be based upon an individual’s (or couple’s) goals and concerns, not upon a general formula. That’s why I keep harping upon creating a financial plan and then sticking to it over the long haul.
But let’s get back to stocks and bonds. A quick look at historical data from various sources indicates that the average annual return for stocks, bonds and inflation for the period 1926 through 2015 is approximately:
Large company US Stocks: 10.0%
Long-Term Government Bonds: 5.5%
If you study the data over a long period of time you will see that after taking inflation into consideration, stocks have returned about twice what bonds have in the last century.
So why, pray tell, would anyone ever invest in bonds as opposed to stocks? You know that answer, of course. It’s those periods when the stock market goes down.
You have heard, perhaps said, “There ain’t no such thing as a free lunch.” The price you pay for excess returns of stocks over bonds is those downturns. An inexact approximation is that on average, every three years you give back one third of your gains. Furthermore, you also know that it goes way beyond gains: Some years you give back gains, plus principal, plus, perhaps, hope and joy.
I can give you information on bear markets, down turns, crashes and corrections, but it’s up to you to decide how you feel about stock market volatility.
And by volatility, I particularly mean down markets. I don’t think I’ve ever received a call from anyone complaining about how fast their account balance went up.
In February of this year, the S&P 500 had dropped by just over 10% from January 1. If you panicked, or lost sleep over that, you probably shouldn’t be invested in the stock market. That was a normal market fluctuation. However, if you’re not invested in the stock market, you are probably shut off from investment growth you need to fend off the effects of inflation over time.
‘Tis a dilemma. The only solution I can offer you is to have a portfolio of stocks, bonds and cash (the stocks and bonds via mutual funds, most likely) that best meets your needs financially and emotionally.
The only way to get there is through investing and planning. And to not forget to enjoy the journey.
I promised to talk about how to invest those IRA funds last month, but I have another point I need to discuss with you first. How do we get started investing, if we have nothing but a house payment, two car payments, three credit card payments, and four kids that require more monthly maintenance that the two cars?
Most of us don’t have a large inheritance or a winning lottery ticket, so where do we get that principal?
The answer, of course is that we must tend to the hard and disciplined work of budgeting and saving. I know it’s not fun to even think about, must less do, but it is essential to success in your personal finances. And the imagined drudgery will turn into enjoyment when you have knowledge and control your finances by managing them instead of them driving you to the poor house.
If you are a budgeter, you wouldn’t believe how many people don’t have a home budget. If you’re not a budgeter, you probably know you need to be, but just keep putting it off. If you’re procrastinating on this please listen to these two suggestions: your financial life won’t get any better for any length of time until you get on top your spending habits, and, your retirement is probably headed for disappoints if you don’t know what it takes for you to live the life you desire.
The on-line tools for budgeting are great these days. Many are available free. There’s also a lot to be said for the old method of using pad and paper, and separating cash for budgeted items into envelopes. If it isn’t there, you can’t spend it.
So the tools are there for budgeting if you have the desire to get going. Once you do, following the essentials like taxes, food, rent, and clothing, savings is one of the items that need to be high on the list.
Consider this: if you invest $100, on the first day of the month, every month, for forty years, and you earn a 2% annual return, you have over $73,000 in savings that you wouldn’t have had if you never start saving. Shoot, if it returns zero percent, you still have $24,000 socked away. If that return happened to be 6%, then there’s almost $200,000 in your nest egg. And if you put away $500 each month…well, you get the idea.
Compound interest over time can do wonderful things for your IRA, but if you don’t save, you’ll simply end up with zero.
So you’ve probably got my point. Begin saving now. If you already are saving, start increasing that saving percentage every year. You don’t have 40 years until retirement you say? Every day counts. Think of it as building your dream home. Every dollar of debt paid down is a brick in the wall; every dollar saved is another brick. Over time, you’ll build that home, the retirement and lifestyle you seek.
Next month, a bit more on the investments, themselves. Really, I mean it this time.