Making Sense of Media Headlines: How Worried (or Confident) Should Investors Be?
Making financial decisions amidst the backdrop of the unknown is an inherent characteristic of investing, but 2017 has brought a marked increase in media headlines related to economic, political and social uncertainty—in the United States and abroad. Though wise investors know not to react solely based on what they see and hear in the media, Fifth Third Senior Investment Strategist Greg Curvall says it’s “prudent for investors to strongly consider that information because it can substantially affect financial markets and investment portfolios.” Yet, he’s also quick to point out that now isn’t a time investors should panic, fear for their financial futures or abandon their current investment strategy.
In fact, Curvall says there are plenty of reliable metrics that bode well for an investor’s portfolio potential. For starters, business confidence—specifically, the confidence of CEOs—is at a 14-year high. “That has typically led to increased capital investment, and hiring,” explains Curvall. The Small Business Optimism Index (which measures companies with 500 or fewer employees) speaks to the health of the domestic economy, too. “When their [small business owners] confidence increases, that has important implications for the U.S. economy,” says Curvall.
He says the Labor Force Participation Rate index, which measures the percentage of working-age adults who are employed, or actively looking for a job, also provides insight into the state of the economy, and where it’s potentially headed. “That metric bottomed out in September of last year. That’s a very positive indicator because it’s telling us that higher wages in the U.S. economy are potentially enticing people to rejoin the labor force, which could lead to faster economic growth,” says Curvall. Data indicating that millennials between the ages of 17 and 37 years old are entering the workforce faster than retirees are leaving it is another positive economic indicator.
That said, Curvall acknowledges that how the markets and economy react to certain factors over the near- and long-term, including the degree of progress the current presidential administration is able to make with its pro-growth initiatives, and future immigration and global trade policies, is unknown.
Managing Risk and Seizing Opportunity
So how should an investor navigate the current economic environment? By staying the course.
“The secret to investment success is a combination of discipline and patience, but diversification lies at the heart of our discipline,” says Curvall. He stresses that while portfolio diversification is key, the Fifth Third investment management team believes that the Federal Reserve will continue to increase interest rates this year—and that we could see three more rate increases before 2017 concludes.
Despite that seemingly worrisome possibility, Curvall says the rate increases are not to be interpreted as a negative event—or one that causes investors to panic: “The Fed has done a really good job of signaling their intentions about rate increases, and the markets and the Fed appear to be on the same page.”
Based on the expectation of higher interest rates, in tandem with the plans that President Trump has shared regarding goals for his administration’s policies, Curvall says investors may want to consider two specific sectors as part of their portfolio strategy: Financials and energy. For those with significant fixed income exposure due to pending (or present) retirement, Curvall reminds that higher interest rates typically mean lower bond prices. “Fixed income investors should proceed with higher levels of caution in their bond portfolio. It may make more sense to be a little less invested in bonds and more towards alternatives,” says Curvall.
As for the younger investor waiting for the perfect opportunity to jump into the market? Curvall thinks there’s still “room to run” in the bull market—but doesn’t recommend any investor try to “time” the market for the perfect point of entry. Instead, he says to invest as early as possible and remain consistent.
How to Avoid Common Investor Mistakes
While no investor or investment expert can predict exactly what the future holds, Curvall says there’s one sure way to lose: Abandoning the discipline behind your investment strategy because of a change in the markets. Despite the simplicity of that sage advice, he says it’s one of the most common mistakes he sees investors make. These simple tips can help investors steer clear of it:
- Stick to a long-term strategy. “Long-term investors have a long-term investment horizon—at least five to 10 years. In that time, you’ll experience shorter periods of heightened volatility,” says Curvall.
- Be honest about your risk tolerance. If you’re so spooked by the thought of losing some of your portfolio’s value, reach out to your financial professional and make sure that you understand the logic behind your current strategy—and that you’re still comfortable with it. “It’s important to maintain discipline—but it’s not a bad idea to revisit risk tolerance. The best allocation you can have is the one that won’t keep you up at night,” says Curvall.
- Expect ups and downs. No one wants to see their portfolio’s balance dip—but Curvall stresses that up and downs are all part of the natural investment cycle. “Even patient and intelligently diversified investors are going to have to deal with uncertainty and challenges,” says Curvall. In fact, he says the market has gone through four corrections (defined as at least a 10% decline) since the financial crisis in 2008; all of those losses have been recouped for those who stayed in the market.
Aside from avoiding typical investor mistakes like those listed above, Curvall says there are two important rules of thumb investors should keep top-of-mind: “Stick to your discipline and be prepared for volatility. When you get spooked and you exit the portfolio, that is when you typically undermine your long-term plan for success.”