Be cautious, but not cynical in investing

The U.S. stock markets have been strong so far this year, really strong. You might think this would make me happy, but it doesn’t. I’m somewhere between concern and worry.
In my 2012 Year End Review, I said I was cautiously optimistic about 2013. And now after several weeks have passed, I still feel the same way, but more cautious than before.
There are two broad narratives playing out in the financial media: the narratives of the bears versus the bulls.
In the bear case the global economy continues to be sick and is not experiencing healthy broad-based recovery. Debt of all kinds is way too high, jobs being created aren’t high-quality jobs, and the only reason we?re seeing any growth at all is because of large-scale intervention from the government (mostly the Fed).
On the other hand, the bulls have been stubbornly resilient. Corporate earnings are positive. Weekly jobless claims and the unemployment rate continue to fall.
Persistently low interest rates have been very good for borrowers. Neither bonds nor stocks are wildly overvalued. Things are getting better, slowly but surely.
Who’s right?
It’s hard to argue that without the Fed, the market would be in trouble. Take away the easy liquidity, the low interest rates, constant monetary easing, and the economy would really suffer.
But we do have the Fed, and that’s just the point: Bernanke has made it very clear that he’s going to do whatever it takes to support the economy and employment.
And so, if we are relying on the Fed, can they keep up this same pace of assistance forever? Of course the answer is no.
If you think the economy cannot recover in time, then you greatly fear that moment when Fed support comes to an end: a weak economy, on life-support for many years, is primed to collapse when its major benefactor withdraws. The bears do not see a strengthening and robust global economy, so they are understandably fearful. On the other hand, many people see an economy that is slowly improving. Several sectors are not just improving, they are growing robustly: health care, technology, auto, consumer staples, to name a few.
I do not know whether the bulls or the bears are correct. The collapse of 2008-2009 taught us that we should be skeptical to the point of cynicism about all things related to Wall Street and the global financial system – I will never trust them again. But even still, I am cautiously optimistic – about the long-term.
My underlying faith in the long-term strength of the U.S. economy outweighs my many concerns and worries. In short, the tremendous resources of the U.S. economy strike me as stronger than what I see as our greatest Achilles’ heel: our morally bankrupt and systemically flawed financial system.
• I Believe in tremendous U.S. resources. Our white collar workforce is arguably the most innovative in the world. The culture and structure of our economy, for all its flaws, encourages and permits entrepreneurship and growth.
• But I fear that our financial system permits unthinkable greed, which could ultimately become our undoing.
From an investment perspective, many people wonder what to do. The course of action that is best for you depends upon your own personal situation and your appetite for risk.
For investors, there are three basic choices.
• Hair-trigger selling: This is the investor that wants to sell as soon as markets go bad, and buy as soon as they look good again. It sounds like an ideal strategy: buy low sell high, right? Problem is, no one’s any good at this with any consistency.
• Weather bad times and good: Just stick it out. When the markets tank, some people hang on and let things come back; they trust that markets always will in fact come back. I agree with an awful lot about this strategy. In 2010 there were so many articles written about how the market had returned exactly nothing in 10 years. But that was misguided because the next three years have been great. So anyone who just hung in there did pretty well. … Unless they owned something like AIG or Citigroup or Lehman or Bank America and so on. Buy and hold can be the best approach, so long as you hold quality. Whether it’s quality funds or companies, buy and hold quality. And, make sure to periodically review.
• Adjust (allocations and expectations): Seek an allocation plan that is a notch or two more conservative than you used to use. I see this as the best option for most investors. Think of it this way: would you rather be too conservative in this market or too aggressive? The risk to being too conservative is that you miss out on some upside of this rally (you’d still make money, just not as much while the market goes up). Or would you rather be too aggressive? Too aggressive and you could find your investments overexposed to risk if a crash occurs (remember 2009?).
No one knows what’s going to happen in the markets. Especially in the short term. Over the long run, I believe America is going to remain a strong and vibrant country. That’s why I remain cautiously optimistic as an investor. But there are unsettling trends that we need to keep watching: Growing income disparity, enduring poverty, proliferation of substance abuse, global debt levels, etc. are issues that should worry us greatly. Be cautious in your assessment of risk: skeptical but not cynical. •


Larson Gunness is an independent investment and financial-planning professional. He is managing director of Gunness Financial Services. He can be reached at larson@gunnessfinancial.com.

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