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How Does Current Events Impact My Investment Portfolio?
There is quite an industry built on trying to understand how news will impact stocks and other investments. Seems that whenever you turn on the television or radio, or your favorite web site, there is always someone there to provide what seems like insightful analysis regarding how an event will play out and impact the economy and/or stock market. The question is this: do these events, and there analysis really matter?
In the long-term, the answer to this question is an emphatic 'no'. Remember earlier last year when many folks thought the economic and financial situation in Europe was so dire that it spelled gloom and doom for our economy and stock market? Well, the US market was up 14% last year and the European stock markets (combined) were up 16% last year. And now the latest news has to do with current events in the Middle East. What does this mean for the stock market? Not much. (Today the Dow is up 150 points!)
What about longer-term trends in our society? Do they have an impact on the stock market? I was sent a note earlier this year about an article in the NY Times that bemoaned our declining labor participation rate. Many believe that the reason the unemployment rate has dropped as much as it has is due to fewer folks even looking for work. The article made note that a lot of men in their prime working years are becoming so discouraged that they are just giving up on even looking for work.
While this is certainly a long-term concern, it is only a concern if it were to continue. Certainly there are many structural problems that folks have noted that could impact our economic strength in the long-term (poor infrastructure, education, diet, environment, etc...) but this country has always had something that was a challenge for that particular time period. None of this really has an impact on long-term investment performance.
There have been many times throughout the last century when the economy did well, but the stock market not-so-well and vice versa. (It seems our economy is still quite sluggish, but if you look at the stock market, it has done remarkably well since March of 2009.) In the end, what drives the performance of stocks is the ability of companies to earn profits. That cycle of creating profits still seems to be in intact. In the short-term there are a variety of factors that impact stock prices, but those factors are usually due to speculation- not fundamental value.
In summary, I would suggest ignoring short-term news and current events when you think about your investments. The best recipe for a successful investment experience is to develop an Investment Policy Statement that details your willingness and ability to take risk, lays out an asset allocation strategy, and most importantly, defines a rebalancing strategy so you never become too much weighted or over-weighted in risky investments. And most importantly, one should define their most important financial goals before implementing an investment strategy.