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Diversification, long-term investing wins in 2013, not predictions

Diversification, long-term investing wins in 2013, not predictions

January 23, 2014

Long Term Vs Short wordsThe truth about investing for the long term got another boost of credibility last year because of the surprisingly strong performance of the U.S. stock market.

In 2013 the U.S. stock market had its best year since 1997. The S&P 500 Index increased by over 32 percent. Experts who forecasted the U.S. as being a poor place to invest are again showing investors that predictions should be ignored. Diversification and long-term investing are what wins; not predictions.

The challenge is uncertainty. Investors often look at credible sources to provide some insight into how the world will unfold and then try to profit from that information.

The more reputable the source, the more people are likely to believe what they say. Now that the year has ended we can look back at the headlines from some of these most credible American sources that falsely predicted a poor performance of their stock market.

In January, the Financial Times started the year by proclaiming that a “Rebirth of Equities Ain’t Necessarily So.” Then in May, they stated “Stock Market Optimism on This Scale Hard to Explain.”

The Wall Street Journal was no better. In February their headline was “Scant Pickup in Economic Growth for 2013.” They kept their negative tone and in July stated “As Investors Rush in, Stocks Are Sending Warning Signals.” In August it was “Lofty Profit Margins Hint at Pain to come for U.S. Shares.”

In early October the Wall Street Journal said “Get Ready for a Drop in Stock Prices.” Finally, in November “Is this a Bubble?”

The headlines were wrong. In fairness, the U.S. has faced some significant obstacles in recent years. America had mismanaged its mortgage lending practices and that caused their real estate market to collapse and drag the rest of the world into a long and difficult recession.

Our southern neighbour was starting to lose their swagger on a number of issues and their political process seemed broken with battling politicians stuck in self-interested rhetoric. The American image was best captured when the once proud and mighty city of Detroit declared bankruptcy in July.

America was broken and who could blame Barron’s cover story in November 2012 warning investors “to get ready for the recession of 2013.”

Our job as investors is to differentiate between the media’s fictional, misleading headlines and the cold hard truth of investing. So let’s look at these misleading headlines from their perspective.

The media is not in the business of making predictions. They do predict but their purpose is to make money from their product which can be a newspaper, magazine or whatever else they sell in order to make a profit.

How can we expect the news media to predict the future accurately when the most qualified hard-working money managers in the world cannot predict with consistent accuracy. If managers’ predictions were accurate their investment returns would be above average and would beat the market which so many credible sources of evidence prove is not the case.

Our advice is simple. Ignore the headlines of the day because they are just random guesses. There is no magic to investing. There is no short cut.

The proven principle of buy and hold works. Second guessing the market by using meaningless predictions is a waste of time, energy and money.