Don't Be Scared
Every so often, the financial markets test investors’ patience. Welcome to one of those times.
Are falling oil prices good or bad? If you drive a lot, they’re a benefit. If you’re Russia, they’re a disaster. If you own oil stocks, you’re suffering big losses, but airline stocks are doing well.
A few weeks ago (also a few months ago, a few years ago), U.S. interest rates had nowhere to go but up. Therefore, bond prices were poised to plummet. What happened? Our bond prices have been rising as U.S. bonds look increasingly attractive to concerned global investors.
After heading straight up for years, stocks took a beating in October (causing a bit of customary panic), more than recovered a bit in November (with the associated euphoria), before falling again recently. Many can’t decide whether to be in or out of stocks.
Then there’s the problem with foreign stocks. Why would anyone want to be invested overseas when the S&P 500 has been having all the fun in 2014?
Now seems like the perfect time for some perspective on:
Oil
If you own individual energy stocks or other oil and gas focused investments (or anything in Russia), you are as much a fool today as I would have said you were yesterday. Focusing your investment bets is, in fact, betting, also known as gambling. Gambling is dumb. Enjoy the lower gas prices and use the extra money to build your properly diversified portfolio.
Interest rates and bonds
Yes, some day U.S. interest rates will rise. Yet, predicting the date has eluded the experts for several years. When they do go up, the value of existing bonds will fall. How much? It depends on the bonds. Longer maturities can take a beating while ultra short-term bonds may barely budge. So, avoid longer-term bonds and stay away from paper that can suffer from other problems, like corporate bonds and foreign paper. When rates rise, your shorter-term securities will mature and be replaced by new bonds at higher rates.
Equity roller coaster
Stocks go up. Stocks go down. Good thing it hasn’t happened in equal measures. Looking back as far as any of us has lived portrays a pretty positive picture for equity investing, long-term. Stocks represent the global economy. So far (knock wood), the global economy has grown pretty steadily for as long as records have been kept (at least a couple of millennia).
US Annual Market Returns
CRSP data provided by the Center for Research in Security Prices, University of Chicago. The CRSP 1-10 Index measures the performance of the total US stock market, which it defines as the aggregate capitalization of all securities listed on the NYSE, AMEX, and NASDAQ exchanges. Indices are not available for direct investment; therefore, their performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is not a guarantee of future results.
America against the world
Okay, I agree, we live in a great country. I wouldn’t live anywhere else. We are also the world’s biggest economy, but there are other economy’s that have made money for investors. As good as we are, we have only been the top performing market in the world twice since 1998. Owning the world has historically smoothed out the bumps.
Annual Developed Markets Returns
In US dollars. Source: MSCI developed markets country indices (net dividends) with at least twenty-five years of data. MSCI data © MSCI 2014, all rights reserved; see MSCI disclosure page for additional information. Indices are not available for direct investment. Index performance does not reflect expenses associated with the management of an actual portfolio. Past performance is not a guarantee of future results.
Scary market
For the most part, I believe in passive investing. I’d rather own a broadly diversified portfolio of index funds than gamble with actively managed products. That said, I have to appreciate the way Dimensional Funds (DFA) manages passive portfolios (I realize that sounds oxymoronic). They attempt to mimic the markets and avoid any predictive behavior. Yet, they apply some smart screens to their massively diversified portfolio approach. That has led them to underweight stock markets that have shown a high degree of political risk. For that reason, DFA funds have hardly felt the effect of the current problems with the Russian economy. DFA’s Core Emerging Markets fund recently had about 1.5% of its assets in Russia (versus Russia’s 4% of most emerging markets indexes).
Conclusion
Diversify. Diversify. Diversify. Then, stop guessing and stop worrying.