Staying In Your Lane
Have you ever been driving along the highway and seen another driver constantly changing lanes and cutting cars off -- putting himself and other drivers at risk -- only to wind up no farther ahead than he would have been if he had stayed where he was? The markets right now are a little like that, as some investors are nervously switching their investment approach.
Things are admittedly somewhat unsettling in the financial world these days. But it is precisely at times like this that investors need to focus on the long term. And, just as when you are on the highway, it is often more efficient -- and safer -- to stay in your lane.
There are a lot of reasons for the world to be on edge. The United States is again at war in the Middle East. Ebola has made its way from Africa to the United States and Europe. And the midterm elections have created even more gridlock in Washington.
On an economic level, Germany, which had been one of the few bright spots in the European economy, is seeing its growth slow down considerably. The International Monetary Fund recently reduced its forecast for economic growth in Germany to a level lower than that of the eurozone overall. Asia is also experiencing a growth slowdown. The IMF predicts that China’s growth will be below 7% for the next few years; that is the lowest since the last century.
U.S. markets also are slowing down, after robust growth in 2013 that saw the S&P 500 rise 30%. P/E ratios are edging up, earnings are moderating, and volatility has returned with a vengeance. Perhaps even more concerning, a growing chorus of experts warns that increasing economic disparity and huge student loan debt will slow growth in the long term.
All the news is not bleak, of course. For the fiscal year that ended September 30, the U.S. budget deficit will be at its lowest level since 2007, before the start of the financial crisis. Unemployment continues to drop, as the country continues to work its way through the lingering effects of the recession.
But in unsettled times, it is particularly important to stick to a long-term plan. At Peachtree Investment Partners, our long-term plan starts with strong companies. In general, we focus on large U.S. companies that have a history of strong management, innovation and high return on capital. We buy the stock of those companies, and then we hold it for the long haul.
The other major part of our investment approach is that we prefer companies that pay dividends. Dividends can help smooth out market volatility and contribute significantly to overall returns. CNBC reports that in the third quarter, the dividends paid by U.S. domestic common stocks increased $12.3 billion over 3Q 2013. In the 12 months ending September 30, 2014, dividends were up $55.5 billion, which is an increase of 27.4%.
There is not much individual investors can do about ISIS or ebola or economic downturns in Europe. Instead, we believe investors should focus on what they can control: their long-term investment strategy. We don't think you should follow a strategy blindly, of course. You need to reevaluate that strategy as circumstances warrant.
However, like the impatient highway driver, you can take a lot of risk and end up where you would have anyway -- or even behind. Instead, we think that having a sound long-term strategy and staying with it gives you the best chance to arrive at your destination safely.
Garry K. Schaefer
Atlanta, Georgia
October 15, 2014
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