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Investors have a tendency to be unable to prioritize or “rank” issues or concerns that will have an impact on their portfolios. For example, given the fact that fear or self-preservation is a greater motivator than greed, investors tend to overweight the negative issues and underweight positive influences. A useful exercise that may help you avoid continuously being scared out of making the appropriate investment choices for your objectives is to assign each a percentage with the entire list adding up to one hundred percent. Then, periodically, update the list along with your rankings. Given the constant bombardment of bad news by the media, this will help you sort out what is news and what is only noise.
We have identified twenty-five different issues, fourteen negative and nine positive, that may have an impact on your portfolio. Please keep in mind that despite the fact that there are 14 negative issues and only 9 positive, this does not imply that we are bearish. Secondly, we have listed the issues in the order that we believe will impact your portfolio, from the most to the least.
First the negative influences. These would include the fact that in an effort to get the economy moving again, the Federal Government is spending too much, putting our credit rating at risk; the labor market remains weak and unemployment remains high most likely hampering consumer spending; higher taxes will cause all to reign-in spending; continued weakness in the economy could cause deflation; the private sector continues to retrench, shoring up their balance sheets and reducing their debt; the across-the-political-aisle fighting is resulting in the inability or the belief that the government is unable or unwilling to deal with the issues affecting America; the government is maintaining too big of a role in the economy when they need to get out of the way and let the private sector do its thing; the United States is turning into a welfare state, one in which ingenuity and creativity will wane; too much government spending and the accompanying deficit may result in a devaluation of the dollar and inflation; the “flash crash” of early May, one which sent the Dow Jones Industrial Average down nearly 700 points in less than one-half hour has weakened investor confidence and caused the belief that the “playing field” is not level; energy prices have risen over the past few years placing U.S. dollars and therefore influence and power outside of our borders; gold is rising signaling destabilization; immigration is placing a strain on our system; the upcoming political season has heightened the rhetoric regarding class warfare; terrorism and finally that the bull market in bonds is over.
On the flip side, we have potential positive catalysts for investors. These include the easy monetary policy or the accommodative stance by the Federal Reserve in the forms of low interest rates and quantitative easing; interest rates will most likely remain low for an extended period of time making stocks more attractive; stocks have gone nowhere for a decade while corporate earnings have more than doubled resulting in an attractive valuation; housing affordability is at multi-decade highs; there exists strong global demand, especially in the emerging markets; excesses in the U.S. housing market are being reduced as time passes; consumer debt is being pared down and finally that there is a transition from defined benefit to defined contribution plans resulting in a continually flow of funds into the financial markets.
THE BOTTOM LINE – Keep in mind that very few investors consider the risk they are assuming when the stock market is rolling. Consider calendar year 1999. Conversely, investors tend to not perceive opportunity amidst market turmoil, concentrating solely on the risk they are assuming. By periodically reviewing the risks you are assuming and weighing them against the potential rewards, investors are much more likely to make an objective, intelligent decision rather than a subjective, fear-driven, emotional one.