Let's Talk About Records
Let’s talk about records.
It’s a word with many different meanings. It can be a verb (“Will someone please record this meeting?”), a noun (“Let the record show that I enjoy listening to records”), or even an adjective (“It’s been a record year for the Golden State Warriors basketball team.”)
As an investor, it’s a word you should treat with caution.
A few weeks ago, the U.S. government released their monthly jobs report for June. The report surprised many economists who had expected low job growth. Instead, U.S. added 287,000 new jobs, far exceeding predictions.1 Wage growth was also up.
Since the report came out, the markets have been on a tear. If you’ve been paying attention to the markets lately, you know that on July 12, the Dow® hit 18,348 points, setting a new record.2 Another index, the S&P 500®, had previously broken its own high only a day before.
How fitting that both these milestones should occur just before the Olympics, a time when the entire world watches to see new records set and old records broken.
But what exactly do these records mean?
Unlike the Olympics, seeing the Dow climb to unprecedented heights shouldn’t stir up a lot of emotion, either positive or negative. Make no mistake, it’s nice when the markets go up. It’s especially nice given the fact that many pundits predicted a post-Brexit fall. (In fact, the markets did fall immediately after the United Kingdom voted to leave the European Union, but the slide was brief and quickly reversed itself.)
But just because it’s nice doesn’t mean it’s time to break open the champagne.
You’ve probably heard me say this sort of thing before, but it’s always worth repeating: neither the Dow nor the S&P 500 are fundamentally any different just because they’ve set new records. 18,348 is just a number. There’s just not much difference between, say, 18,348 and 17,931. True, the fact that the former number sets a record makes for a nice story. But successful investing is based on strategy and discipline, patience and prudence. Not stories.
The reason I say all this is because it’s easy to get caught up in a story. After all, the best stories provoke emotion. The problem is that emotion makes a good servant and a bad master, especially when it comes to investing.
For investors, the two emotions to watch out for are fear and excitement, especially during times like these. For example, take excitement. It was only last year, in May of 2015, that the S&P 500 set its previous record high. Many investors got excited and decided to jump on board the stock train only to watch in horror as the markets plummeted a few short months later. For those investors, excitement got the better of them.
Fear, of course, can lead to even worse decisions. Many investors get jittery when they feel the markets are getting too high, too fast. As a result, they tend to “jump the gun” and sell the moment the markets even hint at falling, even though the next market correction might still be months (or even years) away.
So, to put it simply:
- It’s nice to see the markets going up, especially after last month’s Brexit scare. But ...
- Just because the markets are up now doesn’t mean they won’t fall sometime in the near future. After all, what goes up must come down. That said ...
- Just because we know the markets will cool off eventually doesn’t mean we need to keep our finger poised over the “sell” trigger.
Instead, my advice to you is that we continue doing what we’ve always done. Our philosophy has always been to invest in good companies that will help you reach your long-term goals, while keeping an overall eye on the global economy. It’s a process based on taking our time, thinking things through, and obeying the laws of common sense.
To put it another way, we’re investors, not traders.
Whenever there’s volatility in the markets, I’ve tried to be there to hold your hand and let you know that things will get better. That’s part of my job. It may seem strange, but another part of my job is to be there when the markets are up, to ensure we keep our eyes on the horizon and not get distracted by short-term storylines. I hope I was able to accomplish that with this letter.
As always, my team and I will continue monitoring the markets. In the meantime, please let me know if you have any questions. Enjoy the rest of your summer!
1 Heather Long, “Big rebound: 287,000 jobs added in June,” CNN Money, July 11, 2016. http://money.cnn.com/2016/07/07/news/economy/us-economy-june-jobs-report...
2 Matt Egan, “Stocks have never been higher,” CNN Money, July 12, 2016. http://money.cnn.com/2016/07/12/investing/dow- stock-new-high-record/index.html