SCOTT REED: Economy should be guide in investing

By Scott Reed

Have you ever been hiking with kids? It’s different than hiking on your own. Most adult trip leaders I know will find a pace that suits them and will keep that pace. Uphill may be a little slower than downhill, but finding a comfortable pace and sticking with it is pretty important when you are responsible for getting to a campsite by a certain time or if you are trying to reach the top of a mountain peak.
Many high mountains are not very safe to be on, and climbers often are given a time they have to turn around and head back to the safety of their campsite before nightfall. These are things that usually take some experience to get right.
Kids aren’t born with natural hiking experience; they have to learn it. They don’t really know how to pace themselves. There are always exceptions to this, but after years of taking young people on excursions into the woods, I can tell you that most of them struggle with their pace. When they feel good, they go fast.
Sometimes they go so fast you have to speed up just to keep them in your sight. But that won’t last long because they run out of steam and have to rest. That’s when you stroll by and keep going uphill. Then they hurry to catch up.
Sometime during the trip they will get tired and want to quit, and someone has to explain that they haven’t reached their campsite yet so they have to keep going. Then you have to slow down so you can keep them in your sight because they are barely moving forward.
I like to think of the economy as the adult trip leader right now and the equity markets are the kids. The U.S. economy is just hiking along at a pretty steady pace. It is consistently getting better. Month after month, quarter after quarter, we see signs of the U.S. economy getting stronger.
But the stock market is acting like the kids. Sometimes investors get very excited. They think they see the top of the hill and they make a run for it, just to find out the top is much further. Sometimes they get scared and run the wrong way and the markets go down. Sometimes they get tired and just have to rest for a while. All along, the economy keeps growing and getting better.
MAKING ASSUMPTIONS
Just like most of the hikes I have led, the kids love to talk about the adults. They wonder when we will get tired. They are sure they know when we will stop for the night or when we will take a break for lunch. Most of the time they make these assumptions with very little insight, but with much conviction.
That is what kids tend to do. They are smart enough to have their own opinions and too inexperienced to be right much of the time. They make a lot of mistakes, tend to make the same mistakes over and over again and tend to be wrong as a group. Young people love to make group decisions and rarely will you see one person fight the group and hold his ground if they disagree.
I am making a lot of generalizations to make this point, so you don’t have to write and tell me your child is different. I know he/she is and I am not talking about him/her.
So let’s apply some logic to this theory. If kids tend to make a lot of bad decisions and they tend to make them as a group, then you could say you would not be very successful on a hike if you let the kids make all the decisions without taking into consideration what the trip leader is doing. If the equity markets are like the kids on a hike, then it is safe to say that following the markets without looking at what the economy is doing also is not a very good path to success.
As you think about how you need to position your investments over the next five years you have to use reliable information. Don’t spend so much time trying to figure out the markets. Make your decisions based on solid information. Use the economy as your guide because sooner or later the kids always catch up with the trip leader.
Scott Reed is CEO of Hardy Reed, an investment advisory firm in Tupelo. Contact him at (662) 823-4722 or sreed@hardyreed.com.