With half of the year in the record books, it is hard to know what to think. In May the stock market fell 7%. Thirty days later we are knocking on record highs.
We have set a record for economic expansion, but there are daily grumbles concerning an impending recession.
Six months ago, the Fed was raising rates. Today, it appears they will lower rates before January.
To top it off, we remain in an economic standoff with China.
If you ask us what will happen with tariffs, GDP, the stock market or interest rates the simple answer is “we don’t know.” These items fall in the category of “important, but unknowable.”
However, what if we did know? What would we do?
In answering this, change your perspective. Forget you have a portfolio of publicly traded securities.
Instead, pretend you are the sole owner of HEB, Buc-ee’s or Whataburger. Virtually every Texan has a high degree of familiarity with these businesses. The main difference is they don’t trade publicly.
As such, assume you own Whataburger. Someone whispers in your ear telling you we will enter into a recession. The economy will contract for 12 to 24 months. What would you do?
Most likely you wouldn’t change much of anything. Possibly, you tighten your budget and monitor cash flow a bit closer. The last thing on your mind would be liquidating your wonderful asset with a few clicks of your computer mouse!
As such, the main difference is daily tradability. Since HEB, Buc-ee’s and Whataburger are privately held, they focus on long-term goals. They recognize the true economic value of any business is its ability to profitably provide goods and services over long time frames…. decades. The managers of these iconic franchises know markets and economies will be good and bad over any given period of time.
However, focusing on where you want to be a decade from now allows you to have “investing superpowers.” It allows you to ignore the non-stop “breaking news,” and daily distractions and, instead, focus on things that truly matter.
To ignore the volatility from owning publicly traded securities certain steps must be followed.
First, set aside emergency money. With the Texas heat blazing, the last thing you want is to be forced to liquidate your stock portfolio if your air conditioning dies. Rather, build in a shock-absorber to your portfolio. Set aside six to nine months of living expenses in money market. Emergency money allows you to deal with the financial consequences from things that happen unexpectedly.
Secondly, assess intermediate goals. If you have a child going to college in four years, it makes little sense to put all your education savings in the stock market. Instead, buy higher quality fixed income assets that will mature when you need the money. This allows you to earn some interest while timing the maturity to coincide with when you need the money.
Once you have properly structured your short-term and intermediate money, then think about the stock market or long-term assets.
A stock is nothing more than a business. You own a business because of its ability to produce cash flow and earnings over decades. Whether you own one share or one million shares, behave like you own the whole company.
If you maintain this discipline a few things will happen.
First, you will sleep better as daily issues no longer bother you.
Secondly, fixed income assets may not produce much interest income, but the cash will be available when needed. Additionally, a well-developed portfolio of stocks will produce dividend income. The average dividend is about 2%–similar to a 10-year US Treasury. However, as companies increase profits, they often increase the cash flow from dividends. This enhances the cash flow from fixed income assets.
Thirdly, a proper portfolio offers opportunities to outpace taxes and inflation over a decade-long cycle. Maintaining and growing your purchasing power allows you to get ahead of the game and make your money work for you.
Will we have a recession? At some point, it will happen. However, if your portfolio is properly structured it becomes less of a concern.
As such, proceed with caution. Proceed with an eye on your goals, not your neighbors. Proceed knowing the goals and time frames for different parts of your portfolio.
Dave Sather is a Certified Financial Planner™ and owner of Sather Financial Group. His column, Money Matters, publishes every other week.
