3 Keys to Understanding Investment Markets

Investors are awash in data 24-7 and it’s a challenge to separate what’s important and what’s noise. Carl Richards is a popular personal finance coach and author. He once asked his readers to try this experiment. He asked them to think back over the last couple of years to a time when they read something about money in the news, acted on it, and then with the benefit of hindsight, they were glad they did.

If you’re like most people and try this, the incidents you will remember are less than five and maybe even one (or none). Richard’s point is that we’re surrounded by noise that means little and therefore most of the personal finance information and commentary to which you are exposed should be ignored. Along this line, here are three key points to remember about investment markets you can pick out from the noise:

  1. The future is un-knowable. Yet, most of the personal finance articles, television shows and podcasts are all about trying to guess the future. It’s a waste of time and please don’t pay attention to any future projections and guesses. Instead, use the time to do something fun or learn something new.
  2. In the short term, the stock market is a voting machine. This idea is credited to Benjamin Graham, mentor to the now legendary Warren Buffett.  That is, stocks are judged by their popularity today and what’s popular today may not be popular tomorrow. To illustrate, according to Kiplinger, the best stocks of 2016 were:

Domino’s Pizza

Ulta Beauty

Insulet

Netflix

Lending Tree

Dexcom

Exact Sciences

Entegris

Lululemon Athletica

Nextstar Media Group

Jazz Pharmaceuticals

Only one of the top stocks of 2016 is on the list of the best stocks of 2020 (Netflix) just five years later. The voting machine called the stock market thought the above stocks were hot a short time ago. Now, only one of these companies is popular. BTW, I dare you to name what stocks will be popular in 2026 and put some of your investing money into it. It’s like guessing which boy or girl in grade school will be popular in high school.

3. The best time to plant an oak tree was 30 years ago. The second-best time is today. In other words, if your time frame is long-term, start investing now. If you have cash, invest it now regardless of whether the stock market is up or down. If you are not participating in your company savings plan (401(k) or 403(b) plan), start now, and increase the amount you save in the plan each year. The time value of money (i.e., compounding interest) is invaluable and not appreciated enough. It’s not timing the market that leads to investing success, it’s time in the market.

There you have it: three simple keys to understanding the investment markets:

  • The future is un-knowable.
  • In the short-term, stocks are like high school popularity – hot today and who know about tomorrow.
  • Start planting trees today.

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