Thursday, December 1, 2011
In Times Like These - Ignore The Noise
Well, the summer's been interesting, to say the least. The markets have been dancing like crazy, and everyone's pretty confounded by it all because it truly has managed to trick even the best of them.
Bond King Loses Big
Here's an example: Some of you may have heard of Bill Gross. A few decades back, Bill started Pacific Investment Management Company or PIMCO for short, an investment management company in Newport Beach, California. Today, he manages a $244 billion bond portfolio in his Total Return Fund - the largest bond fund in the world. Many call him the Bond King. He's highly respected for his views on the world economy and is second to none on understanding bond markets across the world.
Back in March 2011, Bill believed that the ending of the Federal Reserve's QE-2 stimulus spending program would lead to a steep drop in US Treasury prices. So he sold his entire portfolio of US Treasury bonds. Now, five months later, Bill acknowledges that betting against US Treasurys was a big mistake... because the European sovereign debt crisis, turmoil in the Arab world, and stock market selloffs drove investors to the safety of... you guessed it, US Treasurys - and ratcheted Treasury bond prices higher. As a result, Bill's Total Return Fund performed rather poorly over the last six months relative to its peers.
So my point is this - even the most experienced investors, supported by the most sophisticated analysis tools - get tricked by the markets. Even they cannot call it right all the time.
Focus On Your Investment Goals
Which is why I repeatedly insist that it is unwise to second guess the market, or bet too heavily against market direction, or pull out of stocks completely and move into bonds, or move away from a balanced asset allocation strategy. Simply because you never can foretell the markets.
Analysts constantly talk about data pointing in one direction or another - home prices, consumer confidence, jobs growth, the effects of Hurricane Irene, consumer spending, GDP growth rates and on and on - down to debating the consequences of a 0.1% increase or decrease relative to expectations... which is well and good for stock and bond fund managers because it's what they do for a living and it serves them well to better understand the markets... but it's not what I'd recommend for individual investors. Leave the micro-trend analysis to the pros. I want you to never lose sight of your investing goals.
In fact, many of you who listen to my radio shows and on-air interviews know that I rarely discuss the impact of one particular market data point and whether that, in itself would lead to a buy or sell. Instead, I like to always stay focused on the big picture, on guiding you to your ultimate investing goals, and educating my listeners on what makes common sense - such as investing in index funds, using ETFs to hedge your portfolio, adding dividend payers to your portfolio, asset allocation, and so on.
Do you see my point? Focus instead on your retirement goals. Understand that over the long run, returns from the stock market beat out all other securities; understand that timing the market or exiting in a downturn will lower your returns, and so forth.
Where stocks were being sold a few weeks ago, they are now being bought with equal gusto. The markets are alternately buoyed by talk of say another stimulus program by the Fed or dashed by news on some other front.
So I'll say this to you - do not get overly involved in finessing each turn or taking short-cuts along the way because it is stressful, labor intensive, expensive (with fees, trading commissions, etc.), and you'll likely lose track of the road you're supposed to be on.
Take a step back and focus on the path you need to stay on - take its bumps, peaks and valleys in stride and keep on it. Because that is the only way you'd be able to leverage the power of the stock market to your own financial advantage. So, just as I am rather unperturbed by data minutiae - I'd advise you to do the same... just ignore the noise.
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Steven L. Pomeranz, CFP is a 29 year investment management veteran and host of "On The Money!" which airs on NPR station, WXEL in South Florida. He concentrates on serving high net-worth individuals and has been named one of the Top 100 Wealth Advisors 2007, by Worth magazine (October 2007 Issue), honoring America's premier financial and wealth strategists.