In spite of our unseasonably warm weather during October, it occurred to me that it was time to drop off our winter bedspread at the dry cleaner. It did feel a bit odd lugging the oversized blanket out of my car on a recent 87-degree day, but the odds are in favor of cooler nights ahead. While doing this, it occurred to me that there’s a parallel here between preparing for the changing seasons and investing for the long term.
Change is certain. Current conditions in the market or with our weather won’t continue indefinitely. Planning for what’s ahead, anticipating change and recalibrating as necessary is prudent behavior.
As much as we wish we could pinpoint when the recession will end, the truth is, it’s impossible to know in advance. Past economic performance doesn’t assure future performance, yet history tells us that every past recession, no matter how long, or deep, or wide, has been followed by a recovery that has lifted our financial markets, and our nation, to new heights, according to Ned Davis Research 2009. This market cycle will be different than the last cycle, just as this winter will be different than prior years. The point is that we need to anticipate and prepare.
Reacting to situations rather than planning ahead can be costly. One year, I waited until the last minute to make the summer/winter bedspread switch. I also happened to be in one of my more frugal phases and decided to wash a king-size comforter at home. This was not a money-saving maneuver, as I ruined the blanket in the process.
Remaining teachable and able to learn from mistakes is an admirable trait. With a few rare exceptions, it remains that there is no shortcut, no easier, softer way, no “endeavoring to become a great man in a hurry,” just discipline and hard work.
Just because it’s unseasonably warm at the moment, or that the markets continue to climb, doesn’t mean that either situation will continue indefinitely. Short-term interest rates continue to remain low. Because the Federal Reserve’s purpose in life is to maintain price stability and full employment, raising rates wouldn’t help either cause. Higher rates could have the effect of slowing any economic growth that we hope to see.
Forecasting the markets is a lot like forecasting the weather. We ask ourselves what the chance for rain is on any given day. This is based on odds, as well as factual information. If I were to extrapolate the short-term weather anomaly into the future, chances are good that I wouldn’t be inclined to prepare for the cooler weather ahead. Focusing on short-term market behaviors can be damaging, and is amplified by volatility.
Another example of giving too much credence to assumptions and trends is our recent experience with housing prices. The bubble in real estate over the past 25-30 years conditioned us to think that housing prices would always go up. Well, we all know how that turned out. If you were caught, you have a double whammy of dealing with the equity markets, as well. The Russell 3000 is a broad U.S. equity index that over the last 30 years (through 2008) has a one-year average annual rate of return of 12.5 percent. The average return did not occur once during that time, though. Twenty percent of the time, the market was down significantly, while more than 50 percent of the time, it was up over fifteen percent. It was only 27 percent of the time that we experienced the “normal” rate of return between 0 and 15 percent.
All of this brings added meaning to the statement, “Past performance is not indicative of future performance.” Growth is contingent upon optimism, investment and consumption. Personal consumption is 71 percent of the economy. Over the last 100 years, that percentage has been closer to 60 percent. It’s difficult to extrapolate much consumption growth by U.S. consumers in the near future, considering the housing and job statistics.
The most recent consumer confidence number came in several points lower than expected, due in large part to the continued weak employment picture. The precious number was 53.4, with the expected number at 53.5, while it actually came in at 47.7.
So, just because it’s 85 and sunny today, I’m still going to pick up our comforter from the dry cleaner as we anxiously anticipate those cooler nights. Don’t get me wrong, there will still be plenty of warm and sunny days ahead, but remember to plan and invest for all types of weather.
Darcie Guerin, financial advisor and branch manager, Raymond James & Associates, Inc. 606 Bald Eagle Drive, Suite 401, Marco Island, FL 34145, provides this article. Gulfshore Life magazine named Guerin as one of the Best Personal Wealth Managers in the Southwest Florida area for 2009. If you have questions, e-mail her at Darcie.Guerin@RaymondJames.com or call 389-1041, toll free (866) 343-0882 or visit RaymondJames.com/Darcie. Past performance may not be indicative of future results.