If you had to guess, what would you think the returns are for the US and international stock markets for the year so far? Would you even expect them to be positive?
In a meeting a few days ago, a client expressed surprise that every single stock fund in their portfolio was positive – and significantly so. As I write this blog, international real estate is up over 23%, large US company fund returns are over 14%, and small US funds are up over 13%. Even international stock funds have returns of 6% or more. To quote our client, “Well, you wouldn’t expect that from the news!”
One of the biggest challenges for an investor is filtering the constant barrage of information that comes at you from a variety of sources. Television and the internet are only part of the problem. Most people have come to realize that the expert being interviewed on CNBC at 9am will probably be contradicted by another expert by noon. However, it’s much more difficult to filter out the warnings and recommendations of friends and relatives who mean well.
When the market lurched through the Great Recession from 2007 to 2009, people were understandably scared, angry and frustrated. They were scared that it wasn’t going to end, angry that so much of their wealth had been erased, and frustrated because they felt they needed to DO SOMETHING to fix their portfolios – to make up for lost time and money.
Investment alternatives appeared on TV that tapped into these emotions: gold funds promising to preserve your principal, annuities that would protect you from losses and investment newsletters that warned about the coming fall of the US, and what to do about it. Scary, but those were the least of your temptations.
More frustrating were golfing buddies who told you they saw all of this coming and had moved into cash early, your brother-in-law who told you he was in a ‘sure-thing’ annuity and friends who said they were never in the market to begin with. All these voices could make you feel insecure at best – and maybe even ready to dump your advisor.
But staying out of stocks and buying alternative investments will make it difficult for you to retire safely, put your kids through college, or take the trip of your dreams. The gains we’ve seen so far this year include the drop we experienced in May. For every positive year of historical stock returns, there are negative days, weeks and months within them. That’s why stocks have long-term returns that are much higher than CD’s – they don’t provide a smooth ride. But you pay for the smooth ride with a reduction in your long term wealth and financial security.
It’s an election year, Europe is still struggling with its debt issues, and Congress seems bound to let the tax rates increase at year end. We may be in for a bumpy ride. With every drop you will inevitably hear from the same friends, relatives and experts that made you doubt yourself before.
Don’t let them get to you. You have a plan.