Streetwise for Friday, April 13, 2018

One of the most difficult challenges in today’s investment climate is maintaining a reality check on your expectations. Given the performance of the markets over the past several years, it is no surprise that many investors seem to have lost track of, or have forgotten, the potential perils of investing and the unpredictability of market returns.

Experience is a force that overwhelms mere words and has indoctrinated many investors to such an extent that copious returns are considered a covenant. Yet, despite the recent stumble, the stock market continues to hold the high ground. Moreover, market declines seldom begin at a time when inflation is under control and the economy is continuing to expand, as is currently the case.

Or, as a certain pink rabbit with an affinity for drums would say, “It just keeps going, and going, and going.” Nonetheless, there is concern that the market’s unrelenting strength over the past several years has blinded many to the risks that always go with stock ownership.

Yet, it would be hard to deny that there is a developing concern that stock valuations have reached a peak and are a precursor to an upcoming recession. Concerns over higher interest rates, lower growth momentum and a potentially serious trade war, with all its implications, are not unfounded.

To allay such fears, Goldman Sachs wrote that there is little evidence of a recession and the associated decline in equities occurring any time soon. That is not to say that investing over the short-term will be a walk in the park. However, it is unlikely that the equity markets will repeat the performance of 2008, or even come close, despite the ongoing talk by in the media of impending doom.

Yes, a recession brought about by higher interest rates and a resultant decline in corporate earnings could trigger a bear market. Presently, the probability of such a scenario remains low.

Without substantial interest rate increases resulting from much higher rate of inflation than is currently in the cards, the occurrence of a recession in 2018 or even 2019 appears remote. Furthermore, the free-cash yield in all the major markets is above average suggesting a continuing underpinning of valuations.

When analyzing portfolio performance, remember that exceeding an index is relative performance. What counts is absolute performance, or a return that is over and above your original investment. Outperforming a negative index number with a less of a negative number is not acceptable.

To accomplish that goal, you need to select investments whose future you yourself can foresee. Please note I said that you can foresee. I have deliberately left out letting a mutual fund manager decide your future, receiving “help” from your friendly stock broker, or tips from Uncle Joe. They rarely work. What counts is careful and deliberate investment planning and analysis, both of which remain the basic rules of navigation in the financial markets.

Investing is remains a judgment game. Good judgment requires a pre-defined analytical process. Therefore, to avoid being part of the lemming pack running for the edge of the cliff, always examine a company’s current fundamentals. If the financial strength of a company has not changed adversely, selling may not be the wisest of moves.

At the same time, stocks are not works of art to be collected. They are intangible objects from which you want to squeeze the greatest monetary return in as short a period as possible.

Yet, it always amazes me how otherwise intelligent and responsible people seem to disconnect after hearing or reading words such as “did you know,” or “I just learned that…”

Attempting to keep your investments in harmony with the endless stream of advice emanating from Wall Street’s prognosticators is futile. Their job is to get your attention; accurate analysis is secondary at best and mania in the markets is their lifeblood.

Never forget that your financial well-being is not foremost in anyone’s mind but yours.

Lauren Rudd is a financial writer and columnist. You can write to him at Phone calls accepted between 9 AM and 3 PM at (941) 706-3449. For back columns please go to