Thursday, July 19, 2018

Don't Base Investment Decisions on The News Of The Day

Andy Means, CFA®
Author position
Director of Investments - Hilliard Lyons Trust Company

"If it bleeds, it leads."

That’s a maxim in too many newsrooms across the country. But it reflects the reality that bad news and pessimism work best for the media’s business models. Frankly, pessimism attracts eyeballs.

The same holds true for the news on financial markets. Dire financial predictions often feed on the insecurities and fears of the investing public and attract an audience of anxious investors. Unfortunately, this fearmongering can lead panicked investors into making poor investment decisions based on the most inflammatory news of the day.

Throughout my 36-year career, I have been asked about the investment implications of the most important topics being discussed in the news. I always want to remain well-informed, but I have never made an investment decision based solely on the news of the day – and not just because I know about this bias toward negativism in the news.

News that could worry you.

Current topics causing fear in financial media are plentiful: 

  • Topping the list is the possibility that we are heading for an all-out trade war with China, Canada, Mexico, and the European Union. This trade war could push – or plunge – us into a recession. 
  • The Federal Reserve may make a policy mistake as it reverses its unprecedented 0% interest rate policy. If the Fed raises short-term interest rates too aggressively and the yield curve inverts (short-term rates higher than longer-term rates), the risk of a recession rises meaningfully. 

Other current concerns with financial implications include: 

  • geopolitical risks (North Korea, Russia); 
  • divisions between our political parties and the resulting difficulty of addressing long-term challenges facing our country; 
  • the ongoing probe by special counsel Robert Mueller;
  • lack of progress on the budget deficit; 
  • our country’s accumulated debt of more than $20 trillion; and 
  • the return of volatility in the stock market. 

This volatile market has reminded investors that stock prices sometimes decline. This reminder stirs unease even among experienced investors who suffered through two 50% stock market swoons in the past 18 years. Investor handwringing over this litany of bad news has led some commentators to call the past nine years "the most unloved bull market in history." 

Even though pundits are quick to make predictions, no one knows whether we are headed for a trade war, a recession, an inverted yield curve, or some other bad outcome. Warren Buffett has proclaimed on many occasions that “forecasts may tell you a great deal about the forecaster; they tell you nothing about the future.” 

Some comfort from a look back

The good news is that the long-term investor doesn’t need to know exactly what the future holds to succeed. Consider that, over the past 25 years, the total return of the S&P 500® has compounded at 9.5% annually. Of course, there were wide year-to-year swings in market prices, but the compounding effect over those years would have turned a $100,000 investment into nearly $1 million ($966,836, to be precise). That is nearly 10 times the initial amount. 

Looking back over this same quarter century, it would be impossible to conclude that the news was mostly good. The economy experienced recessions, a technology industry bust, the bursting of a housing bubble, a financial industry collapse followed by a decade of lethargic economic growth, worries about deflation in a world with too much debt, wars, terrorist attacks, the aforementioned 50% stock market declines – and on and on the list goes. And yet, during this period, an investor could have earned attractive long-term returns in the stock market by sticking with a sensible investment plan and not panicking over the news of the day. 

A clear-eyed look forward

A worrier can find plenty to be concerned about today – but there is also a lot of good news. The economy is growing more vigorously than at any time in the past decade, the Federal Reserve is unwinding its unprecedented emergency policies due to the strength in the economy, corporate earnings are surging due to this growth combined with lower corporate tax rates, business and consumer confidence measures are near record high levels, the banking industry in the United States is stronger and better capitalized than at any time in memory, and the unemployment rate is near a record low. 
As is the case today, the news of the day is almost always a mixed bag. But it shouldn’t keep an investor from instituting or adhering to a sensible long-term investment plan. While emotions on Wall Street run hot and cold, a sound investment plan endures. Investors focused on growth of capital can use the great wealth creation and compounding that is found in the long-term ownership of excellent companies in the stock market. The compounding of the S&P500 mentioned above occurred because of intrinsic value growth of the companies in that index. The news of the day may have changed dramatically, but solid companies endured and long-term shareholders were rewarded. 

Allocating assets

Investors can add high-quality fixed-income securities to their portfolio to reduce the volatility of returns inherent in the stock market. These bonds (or bond equivalents) can also be used to generate a consistent stream of income. Your Hilliard Lyons Trust Company portfolio manager can help you determine the mix of stocks and bonds that is right for you. 

Once that appropriate asset allocation between stocks and bonds is set, it is your mindset that becomes most important. Successful investors think long-term – very long-term. In fact, Mr. Buffett has famously advised investors that they should “only buy something that you would be perfectly happy to hold if the market shut down for 10 years.” Whether your wealth management goals are long-term growth, growth with income, or mostly income-oriented, you should think in terms of decades rather than weeks, months, or years. It is essential that you not allow the news of the day, whether good or bad, to cause you to abandon a sensible long-term investment plan. Successful investing requires discipline and an ability to keep your emotions in check.

At Hilliard Lyons Trust Company we are putting these investment principals into practice for you. We begin by helping you choose an asset allocation that will allow you to accomplish your long-term investment objectives. In security selection, we spend countless hours analyzing stocks and bonds that we expect will pass the test of time and provide attractive rates of return far into the future. Our focus is on helping you achieve your long-term investment goals regardless of the news of the day. 

Past performance is not a predictor of future success. All investing involves the risk of loss.