Most investors spend an inordinate amount of time contemplating what may happen (with Fed decisions around interest rates, political outcomes, macro-economic events, and other factors). Their thought process is, if, then…. if X happens, Y will be the result. Therefore, I should do Z when it comes to my investing. How often have we experienced, however, X never happens (e.g. forecasters have been calling for a recession monthly for over 2 years while stocks kept hitting record highs), or if X does happen, Y is not the result, but something completely different (e.g., the Fed cut the federal funds rate 100 basis points – or 1%, yet many market interest rates are up since then, not down as expected).
When we invest, presumably it is to have funds for future needs – to buy a car, to pay for retirement, to purchase a trip, etc. These things are important to us – they are needs and wants – and ideally, we have more money when that need comes to fruition than we invested today (e.g., if we need $30K to buy a car in 3 years, we invest $25K today and it grows to $30K or more by the time we need it).
Here is the key to investing – both in terms of the results you will likely get, as well as the peace of mind you will have along the way (the ‘sleep at night’ factor): you want to build a portfolio that will achieve your future needs and goals regardless of what happens in the world, not if something happens. Relying on things that are outside your sphere of control and impossible to predict (the thing itself, let alone the market reaction) to fulfill your future needs is playing with fire.
Instead, build a portfolio that is ‘bullet proof’ in the sense that it can achieve your near- and long-term goals regardless of what the world throws at it – because the world always has been and always will be full of challenges, unexpected exogenous events, etc.
So how do you do this? It all starts with asset allocation. Rule #1 in investing is to match your assets with your time horizon. If you need the money in the next couple of years, invest in short duration assets like short-term fixed income and the like. Therefore, regardless of what happens in the stock market, there is a very high likelihood that you will have the funds necessary to make your future purchases (e.g., buying a car in 9 months? Put those funds in a 9-month T bill or CD and the probability that you’ll have more money in 9 months is extremely high. Thus, you can sleep at night).
If instead you are setting aside capital for your future self in 10, 15, 20 years (e.g. retirement and beyond), then a well-diversified portfolio of blue chip stocks will likely be higher (especially after reinvesting dividends) 10+ years hence – regardless of what happens in the world between now and then. Less than 5% of any 10-year periods of US stocks have seen negative returns going back decades upon decades. And by definition you are saying you don’t need the money during that time period (10 years or whatever the holding time frame is) thus you’ll likely be reinvesting dividends. This has the effect of buying more shares during inevitable downturns, which has the impact of reducing your average purchase price and increasing returns.
Investing should be boring. It is not a game, it is not a sport (despite many financial shows having things like countdown clocks until the market closes) – it is a means to fulfilling future needs. The less exciting it is, the better. The less you need to rely on certain things happening in the world for a successful result, the better. A seasoned Financial Advisor can help you set forth a plan that seeks to achieve your goals regardless of what happens in the world, empowering you and giving you peace of mind – and time to focus on the things that are important to you – health, family, work, etc. My gift to you.