This is the best of times, this is the worst of times (my apologies to Charles Dickens). Having spent my considerable adult lifetime studying economics, investing, and personal finance, I cannot remember a more confusing economic landscape. Advising clients as to their financial future options requires balancing the pros and cons of the national (and world) economic outlook. Our crystal ball is hazy.
Governments around the globe frequently lack integrity, instead acting from motives more political than economically astute. Yet, the world economy continues to expand, annually elevating certain groups of people out of abject poverty. Logically, there has to be more to investing success than ramblings of the political class. I believe this to be true.
Perhaps the best lesson in market investing is the simple measurement of growth. Although the Dow Jones Industrial Average (DJIA) is not the broadest and best performance measure for stocks, it is the Index most popular among investors. Beginning with Reagan’s first inauguration, this country, its people, and the market have survived times and events but thrived. From under 1,000 on January 20, 1981, to recently closing over 40,000, nothing keeps the market down for long. Why?
The answer to this seeming dilemma is indigenous to the USA. Capitalism (and not politics) is the engine of prosperity. Our independent business leaders are charged with maximizing profits for their shareholders. No conflicts of interest are inherent in the common pursuit of sustained profit growth.
Why, then, are so many investors fearful?
Since Reagan, we have seen wars, terrorism, financial crises, political upheaval, recessions, tax increases, and any number of events that can, and sometimes have, negatively affected the market. This includes losing about half the value of the major indices in the global financial crisis of 2007 - 2009. Again, recently the DJIA closed over 40,000—practically miraculous.
Today’s salad of economic data and predictions precludes accurate predictions. Fortunately, in the long run, history tells us that the market will continue to provide opportunities for decades.
First and foremost, investors must commit to a minimum of 5 years. Market risk dissipates over time. Sometimes that is challenging, but it works.
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