Most investors worry about the wrong things - things they can't do anything about, like the shutdown, the debt ceiling and the sequester. You're far better off worrying about the right things.
Investors are nervous about the economy, nervous about the stock market, nervous about political dysfunction in Washington.
That’s as it should be. As the old Wall Street saw tells us, “a bull market climbs a wall of worry.” And there is always plenty to fret about.
The problem is most investors worry about the wrong things — things they can’t do anything about and that usually don’t pose much of a threat, anyway. You’re far better off worrying about the right things — things you can actually change that will help you earn a higher return on your money.
For example, right now many investors are obsessed with the sequester, the shutdown, the debt ceiling, the budget wars. But no one knows how this will play out and aside from casting a vote to throw out the bums who represent your particular state, there isn’t much you can do about it.
Besides, commerce trumps politics. No one puts off buying a refrigerator or getting a hip replacement because of what the buffoons — excuse me, our esteemed representatives — are doing in Washington.
Obama is no different
And don’t tell me Obama is different. Yes, he is anti-business, pro-redistribution and a cheerleader for the regulatory state. But we can only wish that the stock market had performed as well under Republican administrations as it has under his.
(The great irony, of course, is that he isn’t willing to take credit for it — not that it’s deserved — since he doesn’t want to come off as uncompassionate about the middle class or a friend of capitalists.)
The Obama bull market is hardly an anomaly. Whatever your politics, you should know that while Republicans make a big deal of saying they are the party of business, the stock market has historically performed much better under Democratic administrations than Republican ones.
Likewise, you shouldn’t worry about the strength of the economic recovery or the near-term direction of the bull market. History shows that even professional economists are no better than chimpanzees heaving darts when it comes to predicting GDP growth, inflation or interest rates.
As for timing the stock market consistently, forget about it. As Vanguard founder John Bogle likes to say, “I don’t know anyone who has consistently timed the market right. I don’t even know anybody who knows anybody who has gotten it right.”
The future performance of the economy and the stock market are always an open question.
What to worry about
So what are the right things to be worried about? The things you can actually do something about.
For example, are you saving enough for retirement? If not, save at least 10% of your post-tax income. (Twenty percent if you’re over 50.)
Are you properly diversified? If not, be sure to spread your risk — and not just within the stock market. Diversify into other currencies. Make sure you own short-term high-grade bonds, high-yield corporates, inflation-protected Treasurys, real estate investment trusts and gold shares.
Are you protecting your principal and your profits? If not, implement trailing stops. Are you keeping a sharp eye on costs? Lower costs lead to higher returns.
And how about taxes? Be sure to hold your tax-efficient investments (like municipal bonds, individual equities and stock index funds) in your non-retirement accounts and your tax-inefficient holdings (like corporate bonds, Treasurys and real estate investment trusts) in an IRA or other qualified plan where they will compound tax-deferred.
In sum, the things that the national media natters about all day — the sequester, the debt limit, the shutdown — are already priced into stocks and pose only a minor threat to your financial well-being. But the other questions — about savings, diversification, expenses and taxes — are hugely important and will have an enormous impact on your financial future.
So my advice is this: Don’t worry. But if you can’t help it, at least be sure to worry about the right things.
The information contained in this article should not be construed as investment advice or as a solicitation to buy or sell any stock. Nothing published by Physician’s Money Digest should be considered personalized investment advice. Physician’s Money Digest, its writers and editors, and Intellisphere LLC and its employees are not responsible for errors and/or omissions.