It’s not unusual for an economic report in a mainstream newspaper or broadcast to focus heavily, if not entirely, on the performance of the stock market. By common measures, if the Dow is soaring, the economy must be performing wonderfully. If it’s plummeting, we’re all in deep trouble.
That’s simply not the case, as is evidenced by current events. The economy has been slowing for several months, largely due to the Federal Reserve having raised interest rates significantly for more than a year, with more rate hikes probable in the future. If the economy and the market were in lock-step with each other, market losses should have followed.
A Slowing Economy, But Market Gains
If, however, you look at the market’s performance over the last four months, you’ll see that, on average, it’s gone up significantly. Volatility means that growth has been anything but steady. An average gain of around 1,000 points during a slowing economy belies the idea that the market and the economy are mirror images of one another.
A better measure of economic health is to measure consumer sentiment. It’s important to ask how people feel about the state of the economy. We recently experienced one of the greatest stock market bull runs in history, but many felt that didn’t impact them. Even those diligently saving in their 401(k)s or IRAs felt the economy was sour because, after paying living expenses and bills, there wasn’t much left over at the end of the month.
Those people likely curtailed trips to the coffee shop or the electronics store, which, naturally, contributed to slowing the economy down, even if their market-based investments were performing well. Healthy retirement savings don’t necessarily make you feel as though you’re on solid financial ground when you won’t access those savings for years, if not decades. By the same token, it’s hard to feel secure about your investments when you’re feeling insecure about the economy.
Stock Market and Economy Are Not The Same
For investors, it’s important to distinguish between the economy as a whole and the stock market because failing to do so can lead to unwise decisions based on misplaced fear or greed. If, for example, an investor is feeling pessimistic about the direction of the economy — something that’s hard not to do when interest rates are on the rise and daily predictions of a looming recession flood our newsfeed — they might assume they’re about to lose a lot of money in the market and sell before that happens.
If, however, their economy-influenced negative predictions fail to materialize, all they’ve done is take themselves off the playing field. If the market fails to mirror what they think the economy will do and instead makes gains, they miss out.
The antidote to the poison pill of chasing dire economic predictions with your investment decisions is simple: Unplug a little! Don’t pay too close attention to the financial news. Some of my clients have been surprised when I told them to stop watching 24-hour news channels. They’ve been sucked into the doom-and-gloom reporting and were tempted to react out of fear by making unwise changes to their investment strategies.
This is where a trusted financial advisor can be particularly helpful. Oftentimes, good investment planning is less about beating the market — that’s quite difficult to do — and more about being a partner who is not emotionally invested in your investment decisions. Approaching investing rationally, with a properly-balanced portfolio that matches your risk tolerance, is a better way to invest than panic selling when things look grim, and greed-buying when they don’t.
No one can predict exactly when the market’s best days will happen, and missing out on just those few days because you are making hasty decisions based on emotions can cost you hundreds of thousands of dollars by the time you reach retirement. It’s far better to remain invested at a risk-appropriate level regardless of market performance or economic news. Historically, the market has always recovered from losses, big or small.
Keeping that in mind when you’re tempted to react to frightening economic events will help you avoid selling investments when they’re down after buying them when they were up. At Asset Preservation Wealth & Tax, we regularly field calls from clients nervous about the latest economic news. By being their trusted, steadfast partner, we can help them avoid costly mistakes and stay on the path to the retirement they deserve.
Stewart Willis is the founder and president of Asset Preservation Wealth & Tax, a financial planning firm in Phoenix, Arizona. Investment advisory services offered through Foundations Investment Advisors, LLC, an SEC registered investment adviser.
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