As we approach the end of the year, the markets are still going gangbusters. Recently, the Dow and the S&P both chalked up records, with the Dow reaching 24,000 and the S&P 500 reaching 2,600 – the second-fastest run to a round-number milestone, according to the Wall Street Journal. The newspaper reported that the markets’ continued bullish behavior now has analysts upgrading their negative forecasts from earlier this year.
But even when the bulls run strong, many stories in the financial media still warn investors of certain doom ahead. Ben Carlson, author of the “Wealth of Common Sense” blog, actually tracked some of the headlines over a period of years. His conclusion? If you believe the headlines, you might think:
- This could be the next stock market bubble;
- This is the most hated bull market of all time;
- Bonds may be in a bubble;
- Tech may be in a bubble;
- The 60/40 portfolio is dead;
- Value investing is also dead; and
- The Fed has no more ammunition to help the economy.
As Carlson points out, it’s possible that all of these things are true, but only because they haven’t happened yet!
Brian Wesbury, chief economist at First Trust, recently noted that the stock market peak before the recession of 2008 occurred 10 years ago this October. He asks readers to imagine that an investment guru had shared with them everything that would happen in the future – from the deepest recession since the 1930s, to the fall of many well-known financial firms, to soaring unemployment and more. Then he asks readers to pretend they were allowed just one investment based on their knowledge, and that they would have to keep it for 10 years. He suggests that it probably would have been difficult for someone to choose stocks, even though that asset has historically performed the best on the basis of total return.
Wesbury’s exercise shows that while pessimists had plenty to say during the recession, their prognostications and gloomy forecasts failed to have much effect. Wesbury believes the right approach was – and still is – to invest in companies and allow world-class business managers to use the money to create wealth.
We decided to run the numbers just to further prove Wesbury’s point. If you had invested $10,000 in one of the following on October 31, 2007, and allowed that investment to appreciate for 10 years, here’s how you would have fared according to Morningstar:
If you had followed the negative coverage and acted accordingly, you clearly would have been leaving money on the table!
Diego Garcia, the Burridge Endowed Chair in Finance at the University of Colorado, studied the correlation between positive and negative financial headlines and the movement of the Dow Jones Industrial Average. His paper, entitled The Kinks of Financial Journalism, concluded that journalists are biased – that they are more negative about market declines than they are positive about strong market performance. While Garcia offers reasons why he believes a negative bias exists, Financial Times Journalist John Authers presented a few thoughts of his own in an article earlier this year. Authers admits that bias exists, but he says it is analogous to investors’ bias in favor of avoiding losses.
So, what should you do with all of this information? In my opinion, you should first take all of the prognostications you read with a grain of salt. Remember, nobody has a crystal ball, and even if they did – and you knew what was going to happen – would it really make a difference?
Second, develop a financial plan and stay with it. Research by Fidelity shows that investors who focused on the long term and stuck to their plans during the 2008 recession fared better than those who got scared and bailed out of the markets. And, in my own personal observation, those who worked with a financial advisor also benefitted, because advisors were able to help their clients avoid making emotional decisions that could derail their future.
M.J. Smith & Associates works with clients who can invest $1 million or more, as well as those who are rapid accumulators, on a case-by-case basis. If you are searching for a fiduciary financial advisor, or would like a second opinion on your existing portfolio, I invite you to contact us for a complimentary, no-obligation review. We pride ourselves on being a voice of reason that cuts through the noise of negative headlines.