The United States has embarked on a historic economic experiment. Initially, $1.9 trillion was borrowed by our government to fund the American Rescue Plan (ARP). So far, the government has committed more than $5 trillion to support our nation during the COVID-19 pandemic. To put this into perspective, that amount is roughly 25% of the entire pre-pandemic U.S. economy. Even before the ARP, Americans held some $2 trillion in excess savings, which essentially is untapped consumer buying power. That is a level of cash not seen since WWII.
Meanwhile, the tide is turning in the U.S. The pandemic is retreating, vaccinations are widely available, and herd immunity is expanding. One recent article claimed that in Las Vegas, “the light switch” of tourism had turned back on. With people emerging from their homes, the pent-up demand for goods and services sets the stage for a strong, soaring economy. Just look around and see what you’re paying for gasoline, food, and need I say real estate? Prior columns have discussed inflation expectations which have been rising for nearly six months, and it would not be surprising to see the consumer price index exceed 3% shortly.
As investors, we again stand at the precipice of uncertainty. But unlike the uncertainty caused by the pandemic, this uncertainty is completely self-inflicted. No country can continue to indefinitely increase their debt faster than GDP growth, which is what our country has been doing for some time now. The acceleration of inflation is also a distinct possibility as the economy roars back. A further round of borrowed stimulus money in the form of infrastructure may turn into an economic shock. People are fine adding gasoline to the fire until the fire burns down their house.
The reality is we don’t fully understand how all this will play out. No one does. So how should we react? What should we do?
Sometimes the hardest thing to do is nothing. With everything changing, it feels like we should be changing as well. These new circumstances require something to change in a portfolio, right? Take a step back and realize what you’re doing by asking this question. You are reacting. You are creating self-doubt. Remember, doubt is one of the more effective ways the financial services industry sells its products, creating activity and friction. They are motivated to get you to “do something.” Unchecked reactions can wreck a portfolio. How can long-term investors make rational decisions if they’re reacting to short-term data? In times of uncertainty, I like to stick to what we know.
We know that creating a plan and sticking to it works. As a country, we are no strangers to uncertainty. Little more than a year ago extreme fear overwhelmed our country. We were all told to stay home, locked inside, to combat an emerging virus killing people at an alarming rate. But we have a history of figuring it out. That’s not to say we always get it right immediately, but we have a track record of rebounding and building a bigger future.
We know if your goals are long-term, your plan should mirror that. We don’t invest money for today or tomorrow. We invest for 5, 10, 25, or 50 years down the road. What impact will this have on us in the future? We don’t know for certain, but looking back just 21 years, I bet some people were asking the same question about the Y2K bug. Uncertainties come and go, but over a long enough time, the markets have always been positive. All that really matters is that you have income when you need it and that you don’t overspend your earnings (income).
We know that historically certain asset classes, such as ownership of businesses in the form of stock, have provided a superior long-term rate of return. But we know that the long-term return is not without short-term fluctuations. At any given time, markets can pull back temporarily anywhere between 10 and 15%, typically at least once every 12 months. This is “normal” and should be viewed with joy rather than fear. We do know this happens; we just don’t know “when.” Instead of inspiring fear, train yourself to recognize this as an opportunity. When things go on sale, I like to buy, not run out of the store in terror.
But we know that people will do just that. Human nature does not see things that way, and when pullbacks happen, it creates opportunities for long-term investors to acquire ownership from short-term traders at discount prices. On which side of the deal would you rather be? Long-term investors with a well-designed plan look at those market declines as opportunities. All successful investing is goal-focused and planning-driven. All failed investing is market-focused and current event-driven. Successful investors stick with their plan over their lifetimes, making rare and subtle changes. Failed investors react continually to random economic and market developments.
What do we encourage investors to do? Set goals, make a plan, and save until it hurts. How much money you keep has a far more significant impact on your success than any investment return you may earn. Put time and the power of compounding to work for you. Stay focused on that strategy. Sometimes the best thing to do is nothing. Whatever you do, don’t bet your future on an emotional reaction to something in the short term.
Will this great American experiment work out? I don’t know. Will inflation come roaring back? Perhaps. Will Americans flush with cash start flying to Vegas in droves? They just might. Will we be in a better spot this time next year? Possibly. Will we be in a better place in 15 years? If you follow historical financial trends, the answer is yes. Invest with that in mind, not for what tomorrow may hold. Don’t bet against America.
https://prosperion.us/wp-content/uploads/2021/05/contractors-install-siding.jpg7401500Steve Boorenhttps://prosperion.us/wp-content/uploads/2017/02/whitelogosized.pngSteve Booren2021-05-18 15:57:242021-05-18 15:57:24Improving Investor Behavior: Sometimes Nothing is the Hardest Thing to Do
Read any financial website, and you’ll find a common thread among the headlines: the market is overvalued. By several historical measures, the stock market appears to be ahead of itself. Valuations are high, and value-focused investors like Berkshire Hathaway Co-Chairman Charlie Munger are calling for a “lost decade,” one in which gains are non-existent while […]