By Scott Reed
I must admit that I was expecting the market to show its enthusiasm when Congress finally came to an agreement on raising the debt ceiling to cover our short-term commitments. The equity markets were down seven days in a row preceding the debt ceiling deal, as the country became fed up with the political posturing that permeated the actions of our Congressional leaders.
What surprised me was that it appears our country has very little faith that our political leaders will keep their word. In the past 100 years we have gone from the written word to remarks prepared by paid writers to emails, blogs, text messages and tweets. We now can get our position out to the masses in real time in less than four words – or can you?
We vote people in based on who has the best sound bites and then we complain about their lack of substance. We don’t give our elected officials the chance to explain their actions if it can’t be done in less than 30 seconds.
So now we have elected officials that seem to tell us whatever we want to hear. It’s no wonder that we don’t trust them anymore. I think our markets are reflecting that lack of trust. There are plenty of problems on which to hang your hat if you want to see the markets decline.
We have problems in Spain and Italy that are worse than we thought. Our economy has had many bumps on its road to recovery. Unemployment is the most significant issue holding us back at the moment. But the road to recovery is never a straight line – it has all kinds of roadblocks and detours before you get to your destination. So from the 30,000-foot view, it still is pretty much business as usual.
I know that it is hard to keep on the same path when you read so many bad things about the path,, but for most of us, that is a pretty good game plan. The first part of a good game plan is to divide your money between short-term (money you may need within the next year or two) and long-term money (money that can stay invested for three years or more).
The short-term money should be in very boring investments that will keep your principal value safe. It’s not sexy, but you don’t have time to make up any loses you may incur in the short-term. Long-term money can be put into an investment portfolio that is more aggressive. The main component of a good investment portfolio for rough times is to have a well-diversified portfolio. You may want to look up the definition of a well-diversified portfolio. Those folks that owned 10 different tech stocks in the Spring of 2000 or owned 10 different bank stocks in the Fall of 2007 will tell you that they weren’t well-diversified. Well-diversified means different assets classes, different styles, different everything. Get that right and you are well on your way.
Rolling the dice in the kind of market we are in can be very risky. Sometimes that risk pays off; many times it doesn’t. It’s not a gamble I am willing to take. For my money, I want to keep my eye on the ball, manage what I know and prepare for a lot of volatility. It’s not going to be easy or fast, but we are on the road to recovery.
Congress has done nothing to instill confidence in our economy around the world but our free enterprise system has always prevailed and I suspect it will again.
Scott Reed, CIMA, AIFA, is CEO of Hardy Reed in Tupelo.