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Is This A Good Time To Invest?

By Jim Miller, CFP, President & CEO

With all of the uncertainty in the world, is this a good time to invest in the financial markets?

This is a question that has been raised recently. It has also been a familiar question throughout my 22 years as a financial advisor. I’m confident it has been a common question throughout the history of the financial markets. Why? Because uncertainty is the norm: in our personal lives, in our communities, in our nation and in our world.

Imagine it is the end of 1937. The country is in its eighth year of the Great Depression and there is a general atmosphere of despair and uncertainty about the future. Those relative few with any money to invest are stinging from a stock market decline of 35% for the year. In the midst of this tremendous uncertainty, we have been fortunate to discover a crystal ball that provides information about the future. While it does not disclose the ultimate outcome of future events, it does describe the nature of the challenges that each will present. As we huddle around the ball, we learn of what lies ahead:

  • World War II (1939 – 1945)
  • Cold War (1947 – 1991)
  • Korean War (1950 – 1953)
  • Cuban Missile Crisis (1962)
  • Vietnam War (1964 – 1975)
  • Arab oil embargo (1973)
  • Inflation rises above 15% (1947 and 1980)
  • Mortgage rates hit 18% (1981)
  • Savings and Loan bailout (1989)
  • Persian Gulf War (1990 – 1991)
  • Russian debt default (1998)
  • 9/11 and global terrorism (2001 - ?)
  • Iraq War (2003 - ?)

Suddenly there is much less uncertainty, yet the upcoming challenges and tragedies that await us are horrifying. On top of everything else, your uncle has just passed away and left you the enormous sum of
$10,000. After the initial shock of comprehending all of this information wears off, you ask yourself: “Is
this a good time to invest in the financial markets?”

I would argue that the most common response, given the information provided, would be that the most appropriate investment is something very conservative, such as under the mattress or in U.S. Government bonds.

The table below illustrates the growth of your $10,000 in three theoretical investment portfolios, each purchased at the end of 1937.

[chart]

Perhaps future uncertainty is our ally when making long-term investment decisions. Had we known in 1937 what we would be facing during the next 70 years, there is a good chance we would have invested very conservatively and our $10,000 might have grown to $400,000. While this is a significant amount, it pales in comparison to the results of the two more aggressive portfolios.

There is no question that great uncertainty remains today, both in our personal lives and on a broader
global perspective. One lesson that history provides is that our economy and the financial markets have
been able to absorb incredible shocks throughout the past 70 years. As troubling as the unknown can be,
we cannot allow it to paralyze us from making sound financial decisions.

Merchants Trust’s investment process was established to address both our clients’ objectives and the uncertainty in the world. Key elements of the ways in which our investment process manages risk are listed below:

  • Global diversification among multiple asset classes and managers – our clients’ portfolios are not dependant on the success of a single asset class, investment style, manager or economic scenario.
  • Analysis of the expected impact on the value of our portfolio strategies under multiple scenarios that could trigger a stock market decline.
  • Ongoing assessment of asset class valuations.
  • Tactical asset allocation—making changes to the weightings of different asset classes in response to scenario analysis and valuations.

Returning to the question posed at the beginning of this article, we believe that this is a good time to invest in the financial markets if it is done prudently and in a manner that reflects your current situation, needs and feelings about investing.

 

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