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Why Should Investors Be Cautious Now?
Lessons Learned From The Shores Of Lake Michigan
By David Peckenpaugh
Learn more about David Peckenpaugh by visiting his bio page.
This summer we got away regularly to the beautiful shores of Lake Michigan. My wife and I love to spend time there with our children and grandchildren. We enjoy visiting with family and friends and taking long walks on the beach. Our grandchildren love playing in the water and I must confess that making sand castles with them provides a certain undeniable pleasure.
Last week, as my wife and I were enjoying some time together on the beach, we saw a storm brewing on the horizon. Within just a few minutes the weather completely changed. A beautiful sunny afternoon turned dark and cold. The placid waters churned and grew rough. The warm breezes turned into tumultuous gusts.
As I was thinking about this storm, I couldn’t help but see the analogy to investing. We don’t know how much longer we will continue to enjoy the rise in the markets while experiencing little volatility. I remain optimistic about the future, but it is also important at this time to be cautious in how you invest your money.
You never know when the weather will change
We were enjoying a lovely afternoon on the beach when the conditions changed on us. Even if we had been watching the forecasts closely, those that provide the weather reports and forecasts usually can’t tell exactly when and where storms might come. I don’t know about you, but while on vacation at the lake, we are usually spending time together outside taking leisurely strolls, swimming or out in the lake paddling our kayak. We will check the forecast in the morning, but I don’t spend my vacations glued to television and computer screens looking at weather reports.
If you are like many, you work hard, earn the best income possible and spend time with your loved ones. You probably don’t have time, nor is it helpful, to watch the financial media trying to make forecasts about the future direction of the markets.
Like Lake Michigan, the market environment is always subject to change and it is our job at Whitnell to make sure we are keeping an eye on the horizon, while making investments and structuring portfolios that can weather the inevitable storms.
Changes in weather are almost certainly coming
When the storm blew up out of nowhere, or so it seemed, I was not particularly surprised. I have spent enough time at Lake Michigan to know these sudden changes can happen at any moment. Is the same true for the markets?
We’ve now gone 2-3 years with prices of many investments moving persistently higher with very little volatility. This may have caused some investors to become comfortable and maybe too complacent, believing that a downturn will not come for some time. Being a student of human behavior, I can tell you that investors’ actions tend to be overly influenced by the most recent past, rather than by taking a long-term perspective.
It is not a good reason to take on more risk just because we’ve experienced relatively placid waters over the last few years. Here is what I mean. Five years ago after a tumultuous market and a downturn in the economy, some investors became extremely risk averse and were not taking advantage of many attractive opportunities at that time.
Today, after relatively stable markets for several years, the opposite may be true as there are fewer opportunities. Many are increasing their holdings of riskier investments in search of higher returns, while a proper degree of caution may be more appropriate at this time.
Which strategy is right for you and your family? That is largely influenced by your long-term goals and your tolerance for market volatility. However, one thing to make note of is that market performance over the last 24 months or so should not be the ultimate indicator of a change in strategy.
Today’s horizon can be deceptive
Every year it seems I hear a story about how some swimmer or small boat gets dragged out into open waters on Lake Michigan by a strong undercurrent. These conditions can be very deceptive and hard to identify. It is not uncommon to venture out into the water and underestimate the undertow or tides that are moving in the opposite direction. Those who do so are at the mercy of forces more powerful than any swimmer or small craft.
In the same way, it can be very difficult to look at today’s market and delineate between good opportunities and those that entail too much risk. Don’t get me wrong. I believe there are still good opportunities for investors to make money today. But you have to work harder to identify them.
As interest rates have been kept at low levels by the action of the Fed and the sluggish growth in the economy, investors have found it necessary to look for other ways to make money. This sometimes has led them into taking on more risk than would be prudent under more normal conditions.
Because of the increase in asset prices, more securities are selling at much higher valuations than in the recent past. My judgment is that this makes it harder to discover which assets are a great buy and which are overvalued.
Being ready to weather out the storm
As much as we love the beaches in western Michigan and enjoy boating or swimming in the lake, there are times when only the strongest and most highly skilled should venture into the water. Much of the time the lake is inviting for almost everyone. However, when the waves are bigger and the winds increase in strength I often find only one or two people out in the water after most others have retreated to the shore. These adventurous individuals have extensive experience and are highly skilled windsurfers and learned over the years how to navigate through the strong waves.
So it is and should be with investing. While no one can predict the future, it is nearly certain that change will once again visit the markets. When the conditions are favorable it seems as though anyone can be a successful investor. Knowing that the market drops from time-to-time, the disciplines and skill of experienced professional investors become increasingly important.
It is impossible to know where the markets are heading next, so it is very important to structure portfolios cautiously. Don’t take unnecessary risks.
Know when to change strategy
When that storm suddenly blew up on me and my wife, we didn’t change our plans. We didn’t pack up and head back home. We didn’t close up the house and prepare to winterize it. Instead, we went inside and watched the storm in amazement. They really are something to see. If we had left, we would have missed several more days of beautiful sunsets.
By the same token, while we don’t know when, there will come a time when the market environment turns negative. Will this be an indication of a change in seasons coming directly ahead? Maybe or maybe not. But in my experience, there are almost always good buys to be found if you put the time and effort into looking for them. The Investment Committee at Whitnell is committed to doing exactly that.
Is it time for you to change your investment strategy? That will depend on many factors. The best way to determine this is through close consultation with your Whitnell financial advisor who can help you update your plan based on your long-term goals. No matter what you decide, a cautious eye toward the horizon is certainly the right call right now.