The current Presidential race has exhibited strong differences of opinion within both the Republican and Democratic parties. Listening to some of the candidates during the debates, it’s almost hard to believe they belong to the same party.
Democratic candidate Bernie Sanders proposes to break up the six largest banks, and unions represent his largest campaign donors. Hillary Clinton’s largest donors are the banks Bernie criticizes, but some unions have officially endorsed her, though their support is far more complicated. Trump and Cruz, the apparent front-runners for the Republicans, might seem to have similar beliefs on immigration, but you wouldn’t know it from the debates or their campaign appearances.
While this election feels divisive, politics have always been a place for strong differences of opinion and radically different responses to the same set of facts.
Investing isn’t much different.
This year has handed us choppy markets in both the US and overseas, and the ride hasn’t been fun. We’ve discussed some of the reasons for the volatility here and focused on how important a plan is to cope, but it’s also important to remember that volatility isn’t our enemy.
The movement of a stock market, whether the market is represented by the Nikkei in Japan, the DAX in Germany, or the U.S. DOW, is caused by the collective differences of opinion of all investors. We’ve talked here about our belief that markets are efficient; that stock prices are set by the collective belief of all the participants in the market, but it doesn’t mean all individuals agree.
Hedge fund managers are known for making big bets based on their opinions, with the expectation that they will be rewarded with outsized returns. In 2015, there were a few hedge funds that bet oil would continue to fall, and they benefited significantly. But there were other hedge funds and a few famous investors such as Carl Icahn and David Einhorn that were similarly convinced that energy would rebound.
Differences of opinion create fluctuations in value, as investors – and speculators – vote with their cash. If these differences of opinion didn’t exist, the value of stocks would be stable. We wouldn’t wonder whether P&G is worth the $66.87 it closed at on September 14, 2015, or its recent $82.64 closing price on February 8, 2016.
In contrast, certificates of deposit are stable and predictable. We know their value each day, and the return we earn is guaranteed. Without uncertainty, stocks wouldn’t provide returns in excess of bonds and cash, and we would be budgeting to live on CD returns of less than 1%.
Market volatility is certainly disconcerting, especially if you are living off the savings you worked so hard to accumulate. But that volatility provides you with a potential for returns that can keep pace with inflation over your lifetime, maintain your lifestyle in retirement, and leave a legacy for the causes and people you love. With investing, a difference of opinion provides an enormous benefit.