The flood is upon us: Multiple problems (real and imagined) with assorted explanations (often contradictory), diverse solutions (including “none of the above”) and an array of outcomes (always including a “dire” possibility). How to invest in such an environment? First, accept the fact that there are simply too many unknowns to develop reasonable expectations. Not only are the uncertainties numerous and serious, but also the interrelationships and potential outcomes lack historical comparisons (meaning experience offers little insight). Adopting this “never before seen” view, we realize that analysis is of little help and others’ prognostications are simply insupportable guesses. That, then, takes us to a unique strategy for this unique environment…
Disclosure: Author is fully invested in U.S. stocks
Step 1 – Block out the noise
As I wrote in, “What Is Investors’ Greatest Risk Today? Misleading News Reports,” there is way too much irrelevant and wrongheaded “analysis” and “advice” out there now. This flood of commentary amounts to a din that can harm rather than help, so the best approach is to ignore it (hence, the ear plugs).
That does not mean shutting out the world. We can be interested in the news, but the goal is not to let it affect or interfere with our investing strategy. The recent Brexit episode is a perfect example. Huge noise with myriad conjectures, but in the end, it simply produced a nice dip for buying U.S. stocks.
Step 2 – Own U.S. company stocks
The one historical comparison we can make is with other unusually difficult times. The eventual outcome is that well-managed companies not only emerge intact, but also often take advantage of special opportunities to create a foundation for growth. Therefore, company stocks look to be the preferred holding in today’s market.
Moreover, U.S. stocks appear to offer better risk-return characteristics because of the U.S. dollar’s strength, companies’ strong financial positions and the relative health of the U.S.’s broad economy. Companies in Europe, Asia and commodity-dependent areas (e.g., Canada and Australia) generally lack those benefits plus have other uncertainties.
But couldn’t non-U.S. holdings produce higher returns when times improve?
Of course, but they also could underperform. That, then, is the crux of the strategy: Invest for growth and control risk. Going outside the U.S. necessarily adds unknowns and uncertainties, meaning the risk of disappointment is higher.
What about U.S. stocks’ supposed full- or over-valuation?
Valuing a stock is a broken clock exercise. Any valuation methodology is right twice in a cycle – as the stock price rises above it, then again as it falls below it. Growth stock valuations are particularly troublesome because analysts’ future expectations frequently miss the mark, often because of conservative assumptions. Therefore, the best approach in today’s market is to focus on a company’s strengths and not expect to find a bargain or to overpay. (In a later, bullish market, when excitement and optimism are the norm, we can worry about prices being too high.)
The bottom line
The current environment does not lend itself to reliable analysis and forecast. There are too many unique uncertainties and unknowns for making anything but suppositions and guesstimates. Therefore, this appears to be a good time to adopt the following two-step strategy:
A final thought: Ignore dividend yield
If there is a fad in the stock market, it is the pursuit of stocks offering a higher dividend yield. Think not of the check a company will write you, but rather think of the investment another company could make with that cash. Especially be wary of companies that currently pay out out most, all or even more than their earnings. You may end up with more cash in hand over the next year or two, but an investment worth significantly less.
This article was written by John S. Tobey from Forbes and was legally licensed through the NewsCred publisher network.
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