We’re facing unprecedented times in our economy. The government is in the midst of a $700 billion bailout. The stock market has plummeted and we are in the middle of a housing market meltdown. Unemployment is increasing as well as gas prices (depending on the day). Now that the elections are over the media says we are entering a recession. If you’ve been following the news you already know we’re facing difficult economic conditions and it may seem as if the end is near.
Daily I’m asked about the economy and at least weekly I receive a media inquiry asking me to forecast it. Rarely do I comment or make predictions on the day to day activity of the economy. I have been following and investing in the stock market for over 15 years. During those years I’ve learned that no one can predict the direction of stock market in the short run, but I am confident that in the long run it will reach new record highs. I learned this during my academic training and then reinforced it by making my share of mistakes.
Those who try to predict the market in the short term are either lucky or wrong. Large investment companies spend millions of dollars hiring investment analysts to predict the economy. Of these analysts, half are right and the other half are wrong, but none are consistently right. This is always true because for every buyer, there must be a seller, and they can’t both be right.
Most of the headlines we hear about the economy are stories of doom and gloom. We hear these stories from newscasters who know little about the economy, but are paid to sensationalize it. Face it, news would not sell if the headlines were, “Everything is going well, just stay the course.”
The more you ignore the short term economic conditions the better off you will be. Focusing on the news will more than likely lead you to make poor choices because these factors have very little impact on your goals. The headlines are beyond your control and have relatively little influence on your investment success compared to the things you can control.
For example, whether the economy goes up or down 10% over the next six months is far less important than you making the maximum contribution to your retirement plan. It’s also far less important who is elected than if you are living within your means and spending within a reasonable budget. And it’s irrelevant what happened to Enron, as long as you are invested in a well diversified portfolio where one or two bankrupt companies only represent a very small fraction of your investments.
I hope you can see from my examples that our individual success depends more on our choices. The current state of the economy impacts us far less than the media would lead us to believe. Each of us will feel the impact of the economy to varying degrees, but do not fall into the dangerous trap of believing those events control our fate—they don’t—we do. It is urgent that you “act now.” You need to act now to get the basics of your financial life in order; but not because of state of the economy.