Like a funhouse mirror, investors’
concerns about whether and when the Federal Reserve will begin to end its
quantitative easing program contorted market responses to economic news last
week. Unexceptional economic reports were treated as good news and pushed stock
markets higher; strong economic reports were treated as bad news and pushed
stock markets lower.
Markets headed south mid-week, but responded
positively to the U.S. May jobs report. It was a Goldilocks report – neither
too weak nor too strong – which showed the Labor Department added slightly more
jobs than expected in May. Apparently, investors thought the increase was not
large enough to spur the Federal Reserve to early action on quantitative
easing, and U.S. stock markets finished the week higher. The Dow Jones
Industrial Average was up 0.9 percent, the Standard & Poor’s 500 Index
gained 0.8 percent, and the NASDAQ rose 0.4 percent.
Uncertainty about the future of
quantitative easing has created volatility in U.S. bond markets during the past
few weeks. Concerns the Fed could begin tapering sooner rather than later, triggered
a sharp increase in bond yields during that period. In addition, several new
offerings in the municipal bond market – issued by cities and states, municipal
bonds typically are exempt from federal tax – have been scaled back or
postponed because of market uncertainty.
If concerns about the end of quantitative
easing continue to dominate, it’s possible markets may continue to respond to
economic news in unexpected ways. So, what’s on deck for next week? Economic
news should include the May retail sales report, initial June consumer
sentiment reading, and inflation data.
Is Investing in the Stock Market More Like
Golf or Tennis? Every sport has a certain way to
measure performance. For example:
·
Running is based on time.
·
The high jump is based on feet and
inches.
·
Football and basketball are based on
points.
·
Baseball is based on runs.
·
The decathlon is based on the
cumulative score from 10 different events.
So, how do we measure success as an
investor?
A recent report from Invesco used golf
and tennis as an analogy for how to win as an investor. The report pointed out
tennis is scored using match play, meaning your performance is measured at
intervals along the way.(1) You can win games, which leads to winning sets,
which leads to winning the match. In effect, tennis players have to win along
the way in order to win at the end of the match.
By contrast, golf is scored using
stroke play, meaning it doesn’t matter who wins any particular hole. Rather,
the winner is determined by who has the lowest cumulative score at the end of
the round or match.
Despite their different scoring
systems, people who win at golf and tennis still need to perform somewhat
consistently throughout their performance. Tennis players can’t play great for
3 games and then poorly in 4 games and still win the set. Likewise, golfers who
triple bogey 12 holes and birdie 6 holes probably won’t win the club
championship.
Now, before we can determine whether
winning as an investor is more like golf or tennis, we have to define what
“winning as an investor” means. Simply put, we can define winning as an
investor to mean you’ve achieved your financial goals within the timeframe
you’ve identified and at a risk level that was acceptable to you.
Using that definition, winning as an
investor is more like winning at golf than tennis.
In golf, the winner is determined at
the end of the round or match and who won each individual hole does not matter.
Likewise, a winning investor “wins” when they’ve achieved their goals by the
end of the specified period.
Of course, real life investing is not
so neat and tidy. Just like golfers sometimes take a triple bogey, the stock
market sometimes takes a big drop. And, while nobody likes to see these
declines, it’s important to understand they will happen.
In addition, golfers are sometimes tied
at the end of a tournament so they have to play extra holes. Similarly, the
financial markets occasionally experience extended declines which may mean it
will take investors longer to reach their goals than originally planned.
Consider this, too: golfers have
numerous clubs in their bag they can use depending on how far they are from the
hole, their lie, and any obstacles that may be in their way (e.g., a tree). On
the tee at a par 5 hole, for example, a golfer might take out a driver because
they have a long way to go. Likewise, for clients who are a long way from
retirement, we might more heavily weigh equities in an effort to pursue a
greater return. Conversely, a golfer on the green facing a 3-foot putt would
pull out a putter instead of a driver while accepting more risk. Likewise, if
you’re in retirement, there are certain asset classes with risk and return characteristics
that may be more suited to your portfolio than a heavy allocation to equities.
Golf, tennis, and investing have a lot
in common. They can all be played competitively and competitive people like to
keep score and win. As a “competitive” advisor, we do our best to “win” the
investment game on your behalf so you can spend more of your time doing what
you enjoy the most… which might include
golf or tennis!
(Investing in
securities is subject to market fluctuation and possible loss of
principal. No strategy assures success
or protects against loss.)
Weekly Focus – Think About It
“I've learned that people will forget
what you said, people will forget what you did, but people will never forget
how you made them feel.”
--Maya Angelou, American author and poet
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