Friday, May 6, 2022

How to Maintain Your Financial Health in Unhealthy Times

https://www.bloomberg.com/news/articles/2022-04-26/deutsche-bank-sees-5-6-fed-target-rate-and-deep-u-s-recession

https://www.bloomberg.com/news/articles/2022-05-03/investors-are-so-bearish-on-stocks-that-the-market-looks-bullish

 https://www.bnnbloomberg.ca/yellen-sees-solid-growth-possible-soft-landing-for-u-s-economy-1.1761068#:~:text=(Bloomberg)%20%2D%2D%20Treasury%20Secretary%20Janet,moves%20to%20bring%20down%20inflation

https://www.bnnbloomberg.ca/u-s-stocks-roar-as-powell-quells-fear-of-jumbo-hikes-1.1760681

https://apnews.com/article/business-stock-markets-asia-sydney-hong-kong-c341786b3e475916247b2fcd5c07602f

                There is a concept in behavioral economics called loss aversion. It refers to the situation that a real or potential loss is perceived either psychologically or emotionally as being more severe than an equivalent or equal gain. We feel more deeply for a loss than a gain or the loss of $100 is far greater than the joy of gaining $100. For greater insight into this concept check out Nassim Talab’s book, Fooled by Randomness. I recommend it for this and many other things. This applied to today’s comments on several levels.

                I have included several articles on the recent happenings in the markets and with various statements by banking and governmental officials which need to be read in order listed to show the progression of thoughts and ideas in the last two weeks. I had a discussion earlier this week with someone who wanted to know what they should be investing in. They didn’t think I had given a very satisfactory answer when I suggested they shouldn’t be doing any investing. I would go so far as to suggest that looking at financial news with the intent of investing should not be done right now. Don’t look or follow or even think about financial news, at least not if you are looking for information to help you choose investments or trying out some strategy suggested by a financial advisor or even well meaning friend. Because the only thing that will happen is you will feel rotten or worse, hopeless. Any investment decision you make right now will result in some loss, possibly a lot of loss and remember, loses contain more negative punch than comparable gains. Granted, your current investments may be taking a hit but then you are not following my initial counsel to avoid looking at financial news with the intent to invest. Think back to the first paragraph about loss aversion. Right now the market is so all over the place any gains (feeling some little good) will be massively offset by losses (feeling much more bad). The articles I have included / listed show how in just a couple of weeks we have gone from despair to euphoria to despair (not quite that extreme but you get the point).

                The first article from Deutsche Bank (April 26, 2022) suggests we will definitely have a recession in 2023 and that the Fed monetary policy needs to be very aggressive, i.e. really jumping the Fed Funds rate up a lot and often. The second article from Bloomberg dated May 3, 2022 suggests investors are too Bearish. “Investors have become so negative about the stock market that Wall Street [read smart money] is starting [to] think a rally may be on the way.” They give several technical metrics to support their thinking. The Third article from BNN Bloomberg (May 4, 2022) states Yellen thinks the Fed can make a “soft landing” for the economy. Again, a couple of reasons are listed. We have a very negative article (recession next year) followed by 2 very positive articles (market likely going up and no recession next year).

                The last two articles show what actually happened. The BNN Bloomberg article is from May 4, 2022 the day of the Fed meeting and the AP article is from May 5, 2022 the day after the Fed meeting. The May 4th article is after the meeting and gives the reaction of markets during the next few hours. Markets are up 3%, joy and jubilation. Several reasons are given including that Chairman Powell says that .75% Fed Funds Rate increases are off the table. All is roses and smells great (an emotional gain). The next day the markets falls 3% (an emotional loss). How could this happen, the fiscal doves had taken over, the world was roses, champagne had been flowing. The talking heads had spoken. We are told in the AP News article that “yesterday’s sharp rally was not rooted in reality and today’s dramatic selloff is a reversal of that misplaced exuberance”. Exactly what does that mean. So, yesterday pundits couldn’t read the signs but today they can? What about tomorrow’s swings, for there certainly will be swings. Will those signs be read correctly? What will be the greater insight and understanding that will allow for reasoned understanding and the ability to plot the market and world economies, especially on a day to day basis. Now do you see why you should not be reading the financial news thinking about investing. The financial noise is so loud individuals can’t hear, let alone think in any kind of reasonable manner. There is little real information in the noise that would allow for reasoned decisions. The financial pundits will never apologize for, attempt to correct nor take any responsibility for any misconception, error or misleading statements . You will find contradictions among the nuggets of truth and accurate information. It is the nature of financial noise because remember, in the markets, information is power and financial noise may contain useful information and….. may not. How do you tell (it is extremely difficult).  

                What should you be doing at this point or any point in which you need to make financial decisions. Think of the tortoise and the hare or slow and steady. Limit your debt to necessities like education, housing (don’t ever consider variable rate financing – too many potential problems) and transportation. Have a diversified portfolio of stocks, bonds, mutual funds. Remember, stocks are usually a longer term investment with the expectation that they will go up and down, mainly up over the longer term. Bonds tend to be a bit more stable and many times move opposite stocks (but not always) and mutual funds, to get more diversity from smaller investments. A mix is good. Look at rebalancing your investments on a regular basis, a good financial advisor can help.

                Hang in there. These are unhealthy times for those that immerse themselves in the dirty waters of too much financial noise (news). Watch from the sidelines. Keep to the regular and steady investing schedules you have established before and don’t think you can time or out smart the market.

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