Over the weekend a friend of mine asked me about the impending “Fiscal Cliff”. For those who fancy themselves news hermits, at the end of the year the US will be up against a budget deadline that was set in the Summer of 2011 Debt Ceiling Crisis. In short, if Congress doesn’t do anything it will force America into a very unpleasant series of spending cuts. The immediate effect is that Gross Domestic Product would go down by 3% immediately which puts us straight back into a recession assuming nothing else is done.
So, this is bad news. My friend asked me what I thought about it and I told him that it was a serious thing, but that it was also just the apocalypse du jour. There will always be things that seem like perfectly logical current events to be scared of. What if Iran gets a nuclear bomb? What if Greece defaults on its debt? What if the Eurozone breaks up? What if the guy I don’t like wins the election?
A challenge I like to do is to have someone name a year in American history and I’ll tell you all the reasons in the world why you shouldn’t have invested money at that time … and then to show you what the result would have been financially if you had gone against your fears. The other night one of my heroes Warren Buffett was on The Charlie Rose Show and mentioned that when he first got into investing all his friends thought he was crazy because obviously the market was over-priced … when the Dow was at the sky-high price of 200 points (in case you thought I forgot a zero, that’s two hundred).
Or we could go back in recently history. Just after 9/11 people kept talking about “the next terrorist attack”. It was often heralded as being bigger than 9/11. It never happened (and we likely have people to thank for this).
A few years ago we were all dreading the double dip recession and the comical thing to me is that we still hear people saying “double dip recession”. The recession has been officially over since June 2009 over 3 ½ years ago, but still pundits talk about the risk of a “double dip”. At some point you have to recognize that the double dip didn’t happen. Or if you must, acknowledge that in a certain sense, all recessions are double dippers since all recessions will be followed by another recession … eventually.
The most common mistake that I see people make is that they treat their portfolio like a game of Gin Rummy. They are constantly trying to reshuffle their cards, selling off the ones they don’t want and picking up ones they think may help them. Clients often ask me what I’m personally investing in. I tell them that my investment philosophy is that I only buy things and never sell them. And when I say never I mean never (unless for some reason it becomes grossly out of balance – in which case I usually buy in to balance it out). When I buy an investment, almost without exception it’s my plan to own that for the rest of my life.
This is a call for optimism, you have to put your flag in one beach and you can’t serve two masters. One master is to be constantly reactive to the Apocalypse Du Jour. The other master is Optimism, or a forgoing assumption that the scary stuff goes away and doesn’t have a long term change in stock valuations. I believe that the near term direction of the market is essentially unknowable; you have to take a stand one way or another.
From my definition, the riskiness of an investment is not measured by its beta (or its volatility, or how much the price goes up and down). Personally I don’t see volatility as the most threatening risk because history tells us that patience tames down the risk, and it’s something that can be planned for quite easily. Risk is the probability of an investment causing its owner loss of purchasing power over the planned holding period. Also, it’s important to keep in mind that the holding period ends when purchasing power is exercised and the money is exchanged for goods (or “buys things”). If somebody has a 30 year investing horizon, what’s the probability that the broad stock market would experience a loss over 30 years? It’s a very low probability.
Investments can fluctuate in price and still not be risky so long as there is a reasonable certainly that they will deliver increased purchasing power over their planning holding period. Conversely, an investment that doesn’t fluctuate in price can be rampant with near certain risk. But that’s a topic for another day.
The bottom line is that you have two choices. If you have a pessimistic outlook, then you have no business investing and I only bid you that historically speaking pessimists are eventually right, but always temporally. Long term pessimism simply has little historical precedent. The other choice is optimism, in which case I heed you to stick to your choice through thick and thin.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. Investing in securities, including stocks and bonds, is subject to market fluctuation and possible loss of principle. No strategy can assure success or protect against loss.
Chad Gordon is registered with, and securities are offered through LPL Financial, Member FINRA/SIPC.