The Headlines This Week are Doom & Gloom.

What were the headlines last week?
We have mentioned previously that the mood of the investing public varies dramatically with the latest news flash, as if the world can change in a day or two. We think it appropriate to remind readers of headlines from two weeks ago.

August 18/10 By Rudi Filapek-Vandyck of MONEY Quote. “It would appear the leading indicator for the Australian economy …… continues to point towards slowing momentum for the Australian economy in the months ahead, even though overall growth should still remain relatively high. ………………. indicates the likely pace of economic activity three to nine months into the future, was 6.0% in June, which remains well above the long term trend of 3.0%.”
August 20, 2010 U.S., U.K., France, Germany Banks `Well Positioned’ on Aaa Ratings, Moody’s Says
Aug 18/10 Bob Eisenbeis – Cumberland’s Chief Monetary Economist Quote: “All of this translates into uncertainty for equity markets as well, hence the drop in the market and flight to Treasuries. What this means for investors is that there will be buying opportunities, of course, especially for those very profitable companies whose shares are now underpriced.”

The point here is that economic news continues to be good and bad. This week, the number of house mortgages in the USA going into default was less, but the number of housing starts fell dramatically. Good and bad. (And ignoring the dramatic effect of government stimulus during comparative periods which usually distorts the comparative figures).

Essentially what we have to remember is that we have been through an extended, indeed artificially extended by easy money, period of rapidly rising prosperity, followed by a dramatic fall. The falls are always much more dramatic and much quicker than the rises.

It takes time for normality and stability to reassert themselves. We will be range bound for some time. There will be periods of rising hopes, followed by periods of dashed hopes. But the ‘next big thing’ will appear and a new class of prosperity and riches will be created. The world does not change. People are people and history repeats.

The Misconception That ‘Markets’ Are Up or Down
Often we hear how ‘The Markets are up’ or ‘The Markets are down’. It is true that most stocks, especially large cap stocks rise or fall as the general market rises or falls. If your portfolio is comprised of mutual funds that mirror the general market, then ‘The Markets Are Up or Down’ really means something to you.

Of course, we often rail against mutual funds as we are not admirers of mutual funds, If your mutual fund contains the biggest of the Dow 50, or the S&P 500, then this phrase repeated so often in the daily news really means something to you.

It is interesting to note that depending on which study you believe in, and of even greater importance, which time period you are using, the general market rises at a rate somewhere between 3% and 8% per annum over extended periods of years. So when The Market is Up or Down, it means that your results this year will be slightly better or worse than the historical average. The fallacy of all of these calculations, is that if you need your money at any particular point in time, either for a family matter, or retirement, or whatever, you had better not want it when The Markets Are Down. Averages are just that – averages. Between points of time, they can be significantly up or down from that historical average.

The Difference Between a Hand Picked Portfolio and a Mutual Fund
Individual stocks do not mirror the Dow. It is true that the general market mood affects every stock, but if stocks in your portfolio are picked for reasons other than they are the largest, or meet some mutual fund’s prospectus requirement, the stocks in your portfolio, can be rising when the general market is negative.

That is why more attention must be paid to your investments. It is always amazing to us, that a person will procrastinate for extended periods on whether to buy a new pair of shoes because they cost so much, or whether to spend more or less on a meal, while at the same time completely ignoring the most important aspect of their financial lives – their investments.

Somehow there is this almost universally held belief that “My Financial Advisor looks after that so I won’t have to think about it”. Perhaps when you buy a used car, you need not look into the vehicle as the used car salesman says it is good. Investment Advisors have one quality that is treasured and valued above all others. That is the ability to give confidence to the listener. They are not chosen by their verified historical performance. They are chosen if you like them. They are chosen if they instill confidence in you. It reminds me of an old saying “People rise in any organization rise to the level of their own incompetence”.

But that is a subject for another day. Suffice to say, that if the value of your investments is not rising this year, then you need a new financial advisor.

Next blog: A Explanation of What Most Portfolios Are Comprised Of & Why