The dollar is strengthening. Is it time to sell? Stocks have pulled back. Is it time to buy? Interest rates are rising–wait, no they’ve fallen. And the economy is uncertain. What’s an investor to do?
When investors get caught up in the latest economic or political news, their portfolios can begin to look like a “Rube Goldberg” device: over-engineered and underperforming. This became clear last week, when the Labor Department issued its monthly employment report. Some folks see the strengthening jobs market as a sign that the economy is improving, which could lead to better earnings and higher stock prices. Others fear that a stronger labor market will cause the Fed to raise interest rates sooner, squeezing margins and putting pressure on profits.
Investing is the process of allocating cash among different assets. Investors have diverse goals but similar objectives: maximize returns given a certain risk-tolerance and various constraints. Some investors have strong stomachs and slept through the dot-com and financial crisis crashes. They can afford a large equity position. Others need most of their money fairly soon, and can’t stand much volatility. Those folks should be in cash and short-term bonds.
What you invest in should be primarily determined by what you need the money for, taking into consideration your income, expenses, liabilities, other assets, and various other issues, like taxes or liquidity needs. It’s one reason I don’t like to talk about what stocks I’m buying or selling. What works for one investor may be totally inappropriate for another. And while we take the current economic outlook into account when we invest, it’s not the most important item on our checklist. The investment process always starts with the investor.
Douglas R. Tengdin, CFA
Chief Investment Officer
Leave a comment if you have any questions—I read them all!