It's clear that the stock market has gotten off to a bad start in 2016. Maybe less apparent was how challenging 2015 was as well. And what about 1987? The stock market was up over 5% that year (including dividends), which seems decent. Yet the 20% drop on October 19, 1987 probably didn't leave investors feeling too good about their portfolio at the time.
Our perception of market performance can be clouded by certain biases. In the case of 1987, it was a major traumatic event. The precipitous decline, however, was only one day. Scary? Yes. But there was no long-term impact if you hung in there as the market made new highs less than one year later. (Of course, I was a young lawyer at the time with no real savings, just a mortgage and an eight day old son.)
The difficulties last year were easy to miss since the S&P 500 Index eked out a small gain. But the broader investment universe in 2015 fared less well. The focus on just one aspect of investments -- large U.S. stocks -- may have prevented us from seeing the bigger picture.
One of the hardest questions I'm asked is some variation of "I have an extra $10,000 to invest and want to know the best place to invest it." The investment part is relatively straightforward. The hard part is making the boring answer I provide seem appealing.
Various external sources prod us to expect out-sized investment results, whether it's financial industry advertising or stories from friends of high returns with minimal risk. (It doesn't exist.) Thus it's not unusual for people to seek the investment equivalent of a home run. Advisors are not always popular when they recommend playing "small ball" instead.
Carl Richards, an advisor/author, describes a small ball strategy as one that "doesn't focus on rare, showy and hard-to-predict events, but on making small, relatively easy-to-repeat moves that compound into positive results over time."
I recently asked how much someone saved if they bought a shirt for $50 that was originally priced at $100. Sounds like a simple question, but you need to dig a little deeper to determine the answer.
The scenario involved Sam and Sadie shopping at Nordstrom. Sam saw a shirt he really liked. At $100, the thrifty Sam had no intention of buying it. Luckily Sadie noticed that the shirt was on sale for $50. This was a price Sam was willing to pay.
Only 19% of the respondents said that Sam saved 50% in the deal. Nearly half (47%) said that Sam saved nothing, while a third (34%) said "it depends."
Many investment opportunities come with a compelling story and an enticing promised return. These investments can be quite complex. While there is no substitute for due diligence, listen to find out how you can apply a quick test to assess the risk of a venture.
Not every enticing investment story is a bargain. In the song "Bargain," The Who sing "I'd pay any price just to get you." Check out this great live version with an aging band that still rocks. A fantastic song, but not good investment advice.
Popeye the Sailor Man has a sidekick named Wimpy, with a prodigious appetite, who famously says "I'll gladly pay you Tuesday for a hamburger today." Wimpy provides a classic example of consuming now and paying later. The Federal Reserve, by continuing to keep interest rates low, is promoting such behavior.
Think of low interest rates as making money cheap. With cheap money, there is an incentive to borrow and consume now and repay the debt in the future.
In fact, that is what the Federal Reserve has sought to accomplish. In response to the recession that began in 2008, the Fed moved to dramatically reduce interest rates in an effort to spur spending and revive the economy.