What's Today's Best Investment? Here's Your Answer
If you have investments in stocks (and I hope you do!), you know that the markets climbed in 2017. And climbed. With an incredible 71 new highs, the markets closed the year up 21% on average, with Emerging Market Stocks (MSCI EM index) leading the pack at 38%. For investors, it was a year to celebrate. But the question now is: where do we go from here?
If you listen to the media, the answers run the gamut from moving everything (yes, everything!) to cash to throwing everything you have (again, everything!) into the high-flying market and cashing in on the rewards. The reality is a lot less exciting. For long-term investors (which I hope you are!), excitement is rarely a good thing. Here’s why:
1. Investing should not be a thrill ride.
If you want a thrill, go take a spin in a sports car. Let your investments be the reliable sedan that gets you where you want to be, when you need to be there. Investors are paid to take risks. Anticipate the ups and downs, but trust that your well-constructed portfolio will grow at an average of 5% to 7% over the long term. When your neighbor brags about her tremendous gains, don’t fret if yours aren’t quite so amazing. Chances are your portfolio is more conservatively allocated, which means that when the market does turn (which it will, eventually) you’ll continue to be reliably moving forward—with just the right amount of risk for you.
2. Toying with a portfolio does not deliver better results.
On Monday, the news broke that Warren Buffet won his $1 million bet with a top hedge fund manager that he could do better than a hedge fund with a passive, low-cost stock index fund over 10 years. Instead of trying to time the market like his rival, he simply rode out the market—even during the depth of the recession. The result: Buffett’s stock fund achieved a 7.1% compound average return. The hedge fund return: just 2.2%. The US stock market has delivered positive returns in 29 of the last 38 years, delivering gains of more than 20% in 14 of those years. That’s the only information Warren Buffett needed to know to win the bet.
3. Even if the market does take a turn, a diversified portfolio won’t get very exciting.
Again, that lack of excitement is a good thing. In 2017, the stock market saw amazingly low volatility—just 3% at its most volatile point. That’s shockingly low considering that most years, even great ones, usually see pullbacks of 10 to 15%. That means your diversified portfoliodidn’t need to rely on its bond holdings last year to protect it from stock volatility. But while your bond holdings likely delivered portfolio returns that were under those of the S&P 500, they’ll be there to calm the waters when the cycle changes in the future.
You get it. A well-constructed, diversified portfolio delivers stable, reliable results over the long term. But what about new investments? With the market so high, what is today’s best investment?
My client Susan got quite the surprise this Christmas when her mother gifted her $14,000. Plus, she received an unexpected work bonus of $50,000. (Cheers to the improving economy!) She called me last week with the big question: “With the market where it is now, should I just hold $64,000 in cash? I don’t want to put it into a market that everyone says is about to turn.”
Susan is not alone. It’s easy to believe the headlines and assume that stocks can’t possibly continue to rise. And yet, historically, that’s precisely what they do. Market analysts and the media have been shouting about an inevitable downturn for years now, and while that grabs a lot of “eyeballs” (which publications both online and off need to sell advertising), they can predict the future as well as you or I can. In other words, they can’t. The one thing we can predict is that the market will continue to rise… over time.
So should Susan take the money that’s burning a hole in her pocket and invest it in stocks today? My answer was not that simple.
I told Susan that before we even began to think about investing, I wanted to review her overall finances. Susan and her husband have an emergency fund, so they have that fundamental element solidly in place. They’d had some home repairs in November and paid for them with a $10,000 check from her HELOC. Plus, they had racked up some holiday debt to the tune of $5,000. The total: just over $15,000 in debt on which she would have to pay interest until it was paid off. Plus, her daughter is a junior in college, and between tuition and room and board, those costs are putting a strain on the family budget.
My recommendation: use the money to pay off the debt entirely, and fully fund the remainder of her daughter’s college, minus what is now in her 529. Once all that was subtracted from the $64,000 windfall, $6,000 remained. Susan would be out of debt, and her daughter’s college expenses would be paid in full through graduation, eliminating that added financial stress each month. We agreed to invest the remaining $6,000 in her portfolio, allocating the money according to her existing strategy.
So what is today’s best investment? My answer is the same as it was for Susan. Your best investment is you.
You’re much more than an investor. You are living your own life. You have your own tax bracket, legacy wishes, and dreams for the future. Whether you have $5,000 to invest or $500,000, look at your financial big picture and make money decisions that help you live your best life—with greater financial confidence than ever. That’s a return the stock market will never, ever deliver.
Most Read IRIS Articles of the Week: Feb 19-23
Here’s a look at the Top 11 Most Viewed Articles of the Week on IRIS.xyz, Feb 19-23, 2018
Click the headline to read the full article. Enjoy!
I’d like to introduce you to Peggy. Born in 1956, Peggy will be 62 in 2018. She has worked in retail her whole life, the past twenty-five years spent in management. Peggy divorced from her husband 14 years ago, is still single and has no children. — Dana Anspach
This week the markets shrugged off last week’s fears and went back to the slow and steady melt up, despite economic news that looked likely to once again rock the boat. — Lenore Elle Hawkins
Themes established in 2017 across a wide range of markets and factors continued to resonate through the fourth quarter. Economic growth was strong and supportive of equity markets across the globe, a range of volatility measures reached all-time lows, and business and consumer sentiment remained elevated. — Yazann Romahi and Garrett Norman
Advisors and investors that feel they are hearing more and more about commodities and the corresponding exchange traded products in recent months are right. That is a natural result of dollar weakness and yes, the greenback is floundering again in 2018. — Tom Lydon
As the industry works to cope with new regulation, wades through an outpouring of new products, learns to satisfy investors’ shifting priorities and manages the active-passive debate, the viability of business units will be questioned, and at times radical measures will be taken. — Peter Hopkins
My hope is that this article points out some opportunities for you to make more money and serve your clients at a higher level and that you decide to do something about it. — Bill Bachrach
Whether the market is flying high or taunting your emotions with new lows and some bumpy volatility, here are four things every investor should keep in mind ... — Lauren Klein
Why financial advisors NEED to understand much more clearly the power of good digital market. With tools like AdvisorStream, it’s easier than ever to get the content you need to drive leads and referrals today! — Kirk Lowe and Matt Halloran
How do some firms and ideas go from nowhere to everywhere in a few short months? All of a sudden a restaurant becomes popular, a gas station gains a cult following, or a Broadway show becomes too popular to get a ticket for years. — Maribeth Kuzmeski
"Worldwide, $27.4 billion poured into fintech startups in 2017, Accenture reports, up 18% from 2016. With so much in play, it’s not surprising that 22 companies are new on this, the third edition of our list." — Chris Skinner
Many sensational headlines have been written the past few weeks about market declines, but two things have increased for sure: the viewership and the ad revenues of financial media organizations — Preston McSwain
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