30 April 2009
The next time you watch television or read the newspaper I encourage you to ask one question - who are "they?" This question pops into my head whenever "they" are quoted as knowing what the next moves in the market or economy will be. In the past six months there has been a lot of negative news and I am concerned that some may blindly follow whatever is read or heard.
In the November 10, 2008 Newsweek lead story ("A Darker Future For Us") the writer asserts that the stock market was no higher in 1982 than it was in 1965. This period is often used in articles to point out that over long periods of time the stock market can move sideways. The message seems to be, do not count on the market for your retirement. Dan Richards, a faculty member in the MBA program at the University of Toronto, points out several reasons why this is wrong but his main point is simply that the facts are wrong. When the media reports that no one made money during this time frame, they ignore dividends. In fact, Richards points out that from 1965 to 1982, the S&P 500 - including dividends - had a 152% return. That is a 6% annualized return which may not seem like much but it is a much different story than Newsweek alluding to no return during that time frame. Dividends have historically accounted for about 40% of market return so ignoring them may be convenient for the writer, but not for the investor.
It is important to understand the agenda behind the information we hear because having both sides of a story makes our decision-making more clear and accurate. In the media, negative stories sell more copy than positive stories. But we must be wary of all experts who claim to know with certainty the future. They are not being forthright with us, since many times they are selling something - for example, those making bear-market predictions often sell bear market research to institutions so it pays for them to get on television and predict more dire news. And relying on this information will lead to a portfolio that is built on today's emotion instead of a well thought-out policy.
The last thing I am suggesting is to be so suspicious of everything you read or see that you become disengaged. Nor am I suggesting that negative news is always wrong. I am suggesting that there are two sides to every story and with all the facts every one of us can make better decisions for our families. I do not want to see a generation of investors decide to stop investing for their retirement based on misinformation.