In managing investments, making decisions based on feelings of excessive optimism or excessive pessimism rarely ends well. Maintaining a balanced perspective in an ever-changing and often chaotic world is a difficult yet critically important part of achieving long-term investing success.
To be sure, the news lately has been enough to scare many people into believing that things are shaping up for another 2008 debacle. Seemingly at every turn we hear of the debt crisis in the Eurozone, the possibility that the United States might not meet its deadline to raise the debt ceiling and the ramifications that may have, China potentially slowing down, and the U.S. housing and unemployment figures remaining at disappointing levels. And this is just to name a few!
While the United States and the rest of the world are facing many significant obstacles, and while nobody knows for sure how future events will unfold, I offer the following examples of recent positive, noteworthy items that went largely ignored:
- Japanese auto manufacturers and parts suppliers resumed shipments after being forced to essentially shut down because of last winter’s earthquake, tsunami, and nuclear incident.
- Foreign and domestic auto manufacturers established new plants and/or increased hiring in the United States, and sales increased meaningfully.
- Companies such as Boeing and Caterpillar expanding and increased production.
- PACCAR (a major manufacturer of large trucks) recently added to its workforce and announced a 50% increase in its dividend. This was especially notable because PACCAR is known for running a tight ship and does not adjust its dividend without careful consideration of its prospects.
- Retail sales continued to grind higher.
- In the aggregate, U.S. companies continued to become increasingly well-capitalized.
- A recent Business Roundtable survey indicated the majority of CEOs of leading U.S. companies were rather optimistic with regard to their near-term sales, capital expenditures, and hiring plans.
Again, I offer these recent positive developments only as a way to help provide some much-needed perspective in the face of all the troubling issues that seem to be dominating the headlines of late.
So before you decide to put the pedal to the metal and invest everything you have in the global equity markets, please note the important caution lights out there. And before you decide to run for cover and go to cash, please note that these same caution lights could soon turn from amber to green.
A much better approach would be to maintain a well-balanced and thoroughly diversified portfolio, keep a comfortable level of cash on hand for emergencies and opportunities, and then let the future unfold.
There will always be plenty of plausible and even compelling reasons to be pessimistic, and plenty of equally plausible and compelling reasons to be optimistic. All those reasons involve predicting the future, which is notoriously hard to do. Think about this: the biggest events that have shaped our economy over the past 10 years were items that nobody predicted.