Do You Believe in the Capital Markets?
May 15, 2019
As much as it would be nice to think we could squirrel away cash under our mattress and have enough money for retirement, the reality is that if you don’t invest in the financial markets, it’s very unlikely that the money you accumulate will stay ahead of inflation and provide the adequate savings you need. Historically, inflation has increased by an average of about three percent per year. This is on par with the historical no-risk return provided by 30-day US bonds. But that’s like treading water in the middle of a lake. No matter how hard you swat away at the water, it’s not going to get you to shore.
The fact is that risk is tied to return and if you want to get ahead of the game, you are going to have to take a prudent financial risk. This brings us right back to investing in the financial markets, which has a proven historical tailwind dating back to 1926 demonstrating the continual growth in value over the long-term.
There are several steps you can take to help mitigate risk and ensure you are prudently maximizing your investment returns in the financial markets. This includes avoiding high fees, taking a broadly diversified asset allocation approach and adopting a long-term buy-and-hold strategy, all of which I cover in-depth in my book: You Are the Boss.
But none of this matters if you don’t have an unconditional belief that the capital markets will increase in value over time.
This is one of the most important discussions I have with my clients, and one that warrants a lot of thought. Because, as I can’t stress enough, without a fundamental belief that the capital markets will continue to grow over the long-term, it’s almost emotionally impossible to hold steady when the markets tank. And when the fear kicks in, bad decisions — such as selling when the market drops — are made, resulting in costly financial losses that most likely will not be recouped.
This is the first step in my Emotional Armor® building process and is so fundamental that I hope you’ll roll up your sleeves and start thinking through your belief system as soon as you finish reading this post. To get you started, here are a few reasons my clients and I trust in the ongoing success of the capital markets.
- Companies are in business to make a profit. It sounds fairly basic, but if companies don’t make a profit, they won’t stay in business—so there is huge incentive to make the adjustments and advancements necessary to ensure financial health.
- CEOs and senior executives are rewarded based on their companies’ Much of a CEO’s compensation is tied to the success of the company—and a large portion of it usually comes in the form of company stock. Along with wanting to perform the job to the best of their abilities, CEOs are personally motivated to do whatever is necessary to maximize profits for the company and its shareholders, because their livelihood depends on it.
- Innovation is Alive and Well. Charles H. Duell, who served as the commissioner of the U.S. Patent Office in 1899, is famously known for his statement, “Everything that can be invented has been invented.” It was a tongue-in-cheek remark that prompted real discussion about whether we, as a society, had already made all of the advancements that were possible. Fast-forward through twelve decades of the most innovative inventions and advancements in human history and you get a sense for just how alive and fluid innovation really is. We now have computers and smart phones that enable us to communicate via text, voice or data at anytime, anywhere in the world. They even talk to us and act as our personal assistants, guiding us where we need to go, playing the music we want to listen to, and researching information we need to find. We have satellite technology that enables indigenous tribes living high in the Andes of Peru or deep in the Amazon jungles of Brazil to access world-class medicine and education through wireless internet-access and advanced video conferencing technology. We’ve had men on the moon and exploration missions on Mars, and now have private companies teaming with the U.S. government to eventually open up space travel to private citizens. We’ve cloned animals and have made huge breakthroughs in medicine and clean energy. We even have driverless cars that will soon be available to the general public. All of these innovations advance companies, the stock market and our society. I’ve only scratched the surface in terms of the enormous advancements we’ve made since 1899, and I’m convinced we are just getting started.
- Growing Population. The population in the U.S. and around the world continues to skyrocket, with the population in the U.S. expected to jump from about 325 million in 2017 to more than 398 million by 2050, according to the U.S. Census Bureau. On the global front, the United Nations Department of Economic and Social Affairs predicts that the population, which currently hovers around 7.5 billion, will soar to 9.7 billion by 2050. More people means more consumption of goods and services, which, in turn, fuels businesses and the capital markets.
After more than forty years in the financial services sector, I’ve learned enough to know that having a strong emotional foundation that enables you to hold steady during volatile financial markets is crucial to your investment success. It’s why I’ve developed my extensive Emotional Armor® training process for every client I take on, and why I’m providing it to you for free here. I can’t force you to take the time and do the work. All I can do is advise you and provide the tools you need. The rest is up to you.
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