Are retail (individual investors) doomed to poor results from investing in the stock market as some predict?
Will the stock market return to the historical results often quoted - 8-10% average annual growth rates?
Will the economy pick up steam and produce growth and profits for investors?
No one knows the answers to these questions with any certainty, however based on the amount of "noise" concerning these topics, you might think the issues have already been decided.
Predicting the stock market is like predicting the weather. Armed with computers and software, traders can make good short-term guesses (minutes, hours and maybe a few days out). Any farther into the future, and it is just an educated guess.
How many times have you looked at seven-day forecasts only to watch the latter days' forecast change with each passing day?
When the stock market is in turmoil (for good or ill), investors need a strong filter to help them make good decisions.
In this case, I'm not talking about one of the many stock filters (screens) that investors use to identify potential additions to their portfolio.
The filter I'm thinking of is a noise filter that silences all those rants and raves that typify a volatile market.
We have become a culture that looks for "defining moments" in everything that happens. You have heard in the past such warnings as:
"Investors who miss this opportunity are passing up a once in a lifetime deal."
That was a familiar admonition during the dot.com boom when soaring markets made everyone an expert (translation: even a monkey could make money in that market).
Just prior to the financial and real estate melt down beginning in 2008, investors were being told the only direction was up and get on board.
A more recent rant goes something like:
"Your portfolio is toast and we are looking at years to recover lost value."
The idea here is nothing works and you are better off cashing out and buying lottery tickets.
Here's the problem with both of these extremes, they represent not thoughtful consideration of the market and where the economy was headed, but sound-bite summaries that are off the mark.
The dot.com boom and bust made money for investors smart enough to get in early and exit with profits before the inevitable bust, as did the real estate bubble before it burst.
The dot.com boom sucked a huge amount of capital into the market, drawn to the promise of untold riches. When those wild ideas that attracted hundreds of millions, burned through all their cash and couldn't produce a marketable product, all that money that could have funded truly promising startups vanished. Burned investors headed for the sidelines.
Likewise, following the financial market meltdown, a huge amount of capital exited the market (even more just vanished with declining share prices).
Worthy startups - those companies that will lead us to new prosperity - are finding money scarce and investors frightened.
When confidence returns to the market after a bust, investors stand to make impressive gains.
However, the largest gains will come to those already invested in the market.
When will the market turn? No one knows and it is still very possible the market will continue its volatility.
None of that changes the fact that the American economy is the most resilient and robust of any in the world. If any country is going to survive a massive economic crisis and go on to thrive, it is the United States.
Investing in the United States is the same as investing in a company in many ways, not the least of which is that it is a long-term investment that rewards patience and perseverance - two qualities in very short supply if you listen to the talking heads.
Long-term investors who focus on great companies have the best chance of making the most of an economy and stock market that are wildly unpredictable when looking at short-term trends and extrapolating.