Friday, February 25, 2011

Families gather around a table to catch up on events of the day. Table Talk is Dan Danford’s way of keeping family and friends informed about Family Investment Center and related topics.

By: Dan Danford, MBA, CRSP of Family Investment Center

One hard thing to understand about investments is how much the environment determines short-term performance. The overall economy, market conditions, interest rates, and/or political factors drive short-term performance far more than most people think.

And, yet, the interaction between these factors isn’t very predictable. I love watching pundits nearing a meeting of the Federal Reserve Open Markets Committee. Some economists predict an interest rate decrease, others an increase. Some say a rate decrease will be good for stock markets, others predict it as negative. Amazingly, 3/4 of these predictions will be dead wrong, and nobody thinks a thing about it … talk about market noise!

There’s powerful research saying that most market noise is useless. That our stock markets constantly ebb and flow, but with a strong upward bias (fueled by corporate pressures to grow). Predicting long-term growth is easy, predicting shorter-term gyrations nearly impossible.

That’s why we don’t “time” the market. Instead, we choose sectors and managers with proven long-term potential. Listen to the late PBS investment guru Louis Rukeyser:

“… in the long run, it doesn’t matter much whether your timing is great or lousy. What matters is that you stay invested. Because the real danger isn’t picking a bad day to invest – it’s missing out on the powerful market surges that come in brief and unpredictable spurts.”

Brief and unpredictable spurts are a problem. If you aren’t there when they happen, you don’t get the rewards. Since spurts are unpredictable, jumping in and out doesn’t work. The lesson is clear, to get solid returns, we need to stay in through tough times.

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