The Biggest Risk of 2020 is YOU
The first full week of the New Year was a good reminder that geopolitical risk is alive and well. The events that transpired in the Middle East initially unnerved investors, causing stock and oil markets to gyrate and for gold to reach new seven year highs, but as tensions diminished, the fallout was contained.
Of course, there is always something to worry about, just ask consulting firm Eurasia Group, which recently released its top risks that loom for the world at large. In addition to Middle East unrest, there’s the U.S. election, tensions between the U.S. and China, climate change, and the ever-present UK exit from Europe. With all of those concerns floating around, it may surprise you to learn that the biggest risk to your investments is likely YOU and your propensity to try to time the market.
In my book, The Dumb Things Smart People Do with Their Money, I devoted an entire chapter to this topic, because I had encountered otherwise intelligent people trying “to predict short-term market movements, and failing. By trying to time the market, you’re potentially making investment decisions that are based on emotions, and that are colored by your own individual biases and blind spots.”
Timing the market can be alluring. Who would not want to be the person, or hire the financial professional, who knows the exact moment when to get in and out of an investment? It’s worth considering how the past two years, along with the past two decades, make a great argument for why trying to time the market is just not worth it.
Imagine this: it’s the end of 2018 and you have poured over the financial press and concluded that 2019 would be another bad year for stocks (in 2018, the S&P 500 was down 6.24 percent). Maybe you decide to get out of or reduce the amount of money you hold in stocks. That decision would have meant that you might have missed the near 29 percent return that the index delivered in 2019. Or what if you had bought into the idea that you could never, ever own a stock again after the horrible “lost decade” of the 2000’s, where the S&P 500 delivered annual returns of -2.7 percent? If you had bailed out of stocks before the next decade began, you would have missed out on the snappy +11.2 percent annual returns from 2010 through 2019.
Even within the 2010’s, there were moments when you might have doubted whether or not you should stick to your game plan. According to LPL Financial, during the past ten years, the S&P 500 posted six corrections (a 10 percent decline from a 52-week high), including two 19 percent slides, one in October 2011, the other in December 2018. John Lynch, LPL Chief Investment Strategist noted that while “the volatility was uncomfortable, stocks ultimately bounced back to new highs each time.”
Instead of trying to game out the peaks and valleys of any asset class, start off the new decade with a simple approach that I outlined in my book: “Decide upon your goals and your risk tolerance, craft a plan to allocate your investments accordingly across the different classes or types of investment using the appropriate index funds, and then stick with the plan. On a regular basis (quarterly, semiannually, or annually), rebalance your accounts, or activate “auto-rebalancing” if your retirement plan or financial institution offers it. If you need to rebalance manually, then rotate some of your higher-performing positions into those that lagged in order to maintain your preset allocation.”
December Employment Report:
The economy added 145,000 jobs, making December the 111th straight month of job gains, the longest stretch in 80 years of data. For the full year, employers averaged 175,000 jobs per month, a downshift from the 2018 pace of 223,000, though these numbers will likely change after the BLS releases its annual adjustment to the numbers in February.
The unemployment rate remained at 3.5 percent, matching the lowest reading since 1969. As a reminder, the unemployment rate peaked at 10 percent in October 2009. Additionally, the broader rate (U-6), which adds underemployed and those marginally attached to the work force, fell to 6.7 percent, the lowest on record since 1994.
Average hourly earnings increased by 2.9 percent from a year ago, with continued gains for entry level and hourly workers. In fact, wage growth for lower earning workers has exceeded that for high-earners by the most in two decades. That’s due in large part to municipal and state minimum wage initiatives, which has pushed the effective average minimum wage to nearly $12 per hour, the highest in U.S. history even after adjusting for inflation.