By Emerson Hartzler
“Where do you hide?” This was a question I got from a friend soon after the beginning of 2014, and he was referring to our investments. Well, I don’t “hide” from anything when I invest, but I understand the concern about what might happen to investments in these times of uncertainty. If you–like me–are retired, and counting on your investments to cover a measurable portion of your living expenses, the thought of losses in the stock and bond markets is a bit scary. Of course you could always “hide” in C D’s and Money Market accounts, but then the rates of return on these types of investments are basically nil, so inflation is going to eventually destroy the purchasing power of the money that remains.
In the world of investments, knowing the future would be a significant advantage, so I will make some predictions about 2014: Cash (CD’s, Money Market and savings accounts) will be stable, the price of high quality bonds (with short maturities) should be less volatile than stocks, and the price of stocks will once again be the most volatile of the three.
OK, so that’s not a very bold prediction, but that’s the good news…it’s absolutely what I expect. It’s also why I place no credence in all the experts’ forecasts for 2014. The point is this: What happens to the stock market in 2014 (or for the next several years, for that matter) is of little interest to me. What happens to stocks and bonds over the long term (five years or more) is very important. Let me explain the logic of that statement a bit.
The Certified Financial Planners (CFP) with whom I work structure their clients investments into three “buckets” of money. The first bucket consists of dollars that are going to be needed in the next few years, and that money is put into stable investments (the aforementioned CDs, Money Market accounts etc.) that may not earn much. But then you are not taking a huge risk that the money won’t be there when you need it. In other words, you are much more interested in the return of your money than the return on your money.
With dollars you might need in, say, four or five years, you might take a bit more risk and invest in high quality, short-term bonds. These “bucket two” investments should earn a bit more than the “cash” you have in the first bucket, but the risk of decline is also minimal.
For people like me, that leaves the vast majority of their money in the third bucket, and the key here is you can afford to be patient with your “bucket three” investments. To paraphrase Warren Buffet: “The stock market is very effective in taking money from impatient people and giving it to patient people”. In my lifetime, the longest time it has taken the stock market to “recover” its former value is about 4 ½ years, so if you don’t need the money (or very much of it) for five years or more, you can probably wait to sell until stock prices are again high. So all of my “bucket three” money is in stocks (I own more than 12,000 companies; I like my diversification to be on steroids!), so quite frankly, I don’t care what happens to the stock market in 2014! But over the long term, stocks typically provide returns superior to bonds or cash, and are the investor’s primary antidote to inflation.
One of the CFPs in my office has already received 48 emails from various financial publications and money managers with their guesses/predictions for 2014 (Do that many people really get paid to guess for a living?). As you can imagine, they completely run the gamut from “explosive” economic growth to “a stalling economy.” The point is that this is the nature of investing: it’s unpredictable in the short run.
Read this column if you’d like to see how far off some of the “experts” were in their predictions at this time last year. There is an old saying that goes “better to keep your mouth closed and be thought a fool than to open it and remove all doubt.”
Emerson Hartzler, MBA, is a Lakeview Village resident, and, though he lives in a retirement community, he continues working as a financial advisor for Triune Financial Partners, LLC, at Lighton Plaza, 7300 College Blvd., in Overland Park, Kan. Reach Triune at 913-825-6100.
Learn more about Lakeview Village–the senior neighborhood of choice, and the largest retirement community in Kansas–by visiting our website at lakeviewvillage.org, or checking us out on Facebook.