I have been investing for 38 years. While many cycles have been less fun than others, the markets of recent memory rank as my least favorite. Information travels at the speed of light and public markets respond to news just that quickly. What the market sees as positive one day can send the market into a downward spiral the next; bold moves by the Federal Reserve being a recent example. Predictability is difficult, if not impossible, to find.
When I was young ABC, NBC and CBS were the ONLY 3 channels on television. Bewitched was one of my favorite shows. What was not to like? Whenever Samantha got into a bind, she would work her witch magic by twinkling her nose. In seconds all would be well. If only the solution to our problems were so easily reached in 2011.
Unfortunately, we cannot twinkle our noses and make it better. The public markets reflect the optimism or pessimism of the collective market place. Each day buyers and sellers appear. If there are more sellers than buyers, prices fall. Forget all the complicated explanations of how markets work; it really is that simple.
In the last few weeks pessimism has reigned as the focus is on the Euro, a onetime challenger to the US dollar as the currency of choice, and problems with member nations and excessive debt. This pessimism is specifically clustered around Greece, followed by Italy, Portugal and Spain. Add to that the constant media attention to a possible double dip recession, the inability of our government to take positive collective action and you get a large dose of pessimism with a side of falling equity markets.
The reality we cannot escape is equity markets reward us for taking risk over the LONG term. In the short term they can be extremely volatile. As information flows faster, volatility has increased.
If you are a client of Mackey Advisors, it is likely you have a gone through The Prosperity Experience, our financial and investment planning process. In that process, we look carefully at the composition of your portfolio, stocks, bonds, commodities, real estate, US and foreign holdings. We also look carefully at your cash flow needs and requirements over the next 3 to 5 years. As part of your plan, we look to see that your cash and short-term bond holdings were equal to 3 to 5 years of spending.
Equity markets tend to correct for excessive pessimism or over optimism (remember the late 1990’s? it seems like forever ago, but one day we’ll be optimistic again) every 3 to 5 years. For that reason, logic tells us to hold cash and things that have low volatility equal to 3 to 5 years of cash flow needs. This way we can sit out the volatility and wait for the markets to restore to a level of normal price/ earnings relationship.
Since none of us can twinkle our nose and impact the public markets, what can we do?
- Review and update your financial plan. Good decisions are made with data and a clear plan. Reactive, impulsive decisions rarely get you where want to be. At Mackey Advisors, you can update your plan at anytime, just call or email us for an appointment. There is no additional charge, ever, to update your plan, as often as needed. We are here to serve you. Come into the office or have a remote update session. We want to hear from you.
- Think positive thoughts. Act positively about the economy. Make plans in your business for growth and expansion. You either contribute to the negativity by placing your attention on the fear the media and others put out daily, or you can stay centered and grounded in the present and hold a positive focus. The choice is always yours, in every moment. Negativity is contagious, as is positivity. Collectively, we have just gotten rusty in our positivity. Start a movement. It only takes one to begin.
- Review your cash flow. What is coming in and what is going out? Compare your 3 to 5 year cash needs with your bond and cash portions of your portfolio. This is what creates your short-term paycheck. If you see the need, pull back on your discretionary spending in the short term.
- Look for positive news. Studies of human behavior tell us we see what we are looking for. Every day I meet with entrepreneurs who are expanding their businesses and tell me about price increases for commodities, growing their sales, or workforce. I read news reports about public traded companies meeting or beating earnings reports. In the long term, if companies are making money market prices will follow. Find the good and put your attention there.
- Stay the course with your investment plan. Stick with your discipline. If your plan calls for 60/40 stock/bond allocation, stay with that allocation. Market timing only works in hindsight. You never know when yesterday’s bad news will slow and tomorrow’s tiny bit of positive will send the markets upward. Stay invested and keep your allocation. Discipline always trumps emotional reactivity.
If none of this helps, call us at 859–331-7755, ext 2 or email me at Mackey@MackeyAdvisors.com As your Wealth Advocate, we are committed to empowering confident action.