Streetwise for Sunday, December 31, 2017
“…The world looks brand-new,” said Hobbes. “A New Year…a fresh clean start,” said Calvin. “It’s like having a big white sheet of paper to draw on,” said Hobbes. “A day full of possibilities,” said Calvin. “It’s a magical world, Hobbes old buddy…let’s go exploring.”
Bill Watterson wrote those words in December of 1995 as he concluded the last of his Calvin and Hobbes comic strips. Every year since then I open my first column of the New Year by quoting that phrase because the message is so abundantly clear. The financial markets are analogous to Calvin’s magical world…full of possibilities. All that remains is for you to go exploring.
Looking ahead, I believe the economy is poised to grow at a rate of about 2.6 percent and as the economy goes, so go earnings and therefore stock prices. Yet, too often investors have an overly optimistic outlook for their investment performance. Many expect an 8.5 percent return above inflation, whereas 6 percent might be more reasonable.
If you consider inflation’s compounded average growth rate of 3.2 percent over the past 40 years investor expectations can run as high as 12 to 13 percent annually. And while pursuing that level of return is possible with a 100 percent equity portfolio, 77 percent of individuals describe themselves as cautious rather than aggressive, meaning they blanche at the idea of an all equity portfolio.
Surveys have shown that about 80 percent of investors choose safety over performance. This disconnect between the returns individuals expect and the risk they can bear, leads to emotional decisions and critical investment mistakes that can destroy investment goals.
While investors often say they could do better by avoiding emotional decisions, by their own admission they know they are susceptible to their own emotions, especially when the markets are volatile.
A major study done in conjunction with a major university over two years utilizing more than 20,000 respondents, asked investors how they would respond if the market dropped 10 to 20 percent over a six-month period.
Only 18 percent said they would add to their equity investments, whereas 45 percent said they would sell off their stock holdings and 38 percent said they would do nothing. Buy when others are selling.
When asked about defining risk, 35 percent defined it as losing assets or wealth. 20 percent defined it as exposing assets to volatility. Eight percent defined it as missing out on an investment opportunity. Yet, the mathematical definition is the standard deviation of your returns away from their average return.
The key to your 2018 financial success will be in direct proportion to the effort you put towards the analytical analysis of future corporate revenues and earnings.
Investing in stocks has been and always will be the greatest wealth builder of all time. Yet, as we move into the New Year if you are apprehensive about what lies ahead, take heart. Over time, common sense in combination with a modicum of patience, will often produce annual investment gains that exceed the S&P 500.
Focus your attention away from the continual prognostications of what might happen and instead concentrate on how to best allocate your investment resources among individual companies. You can forecast a company’s performance; you cannot forecast the market’s performance.
You will be inundated with 2018 market forecasts of every description. Many will try to conjure up a primordial fear of Wall Street, but offer salvation…for a price. Do not to fall sway to the passions of the market, the tenets of its prognosticators or those selling new improved versions of snake oil. Instead, consider the words of Wall Street legend Lucien Hooper.
“What always impresses me,” he once wrote, “is how much better the relaxed, long-term owners of stock do. The relaxed investor is usually better informed and more understanding of essential values; he is more patient and less emotional.”
Next week I will discuss the greatly anticipated list of 12 stocks. Until then relax and have a healthy, happy and safe New Year.
Lauren Rudd is a financial writer and columnist. You can write to him at LVERudd@aol.com. Phone calls accepted between 9 AM and 3 PM at (941) 706-3449. For back columns please go to www.RuddReport.com.