Monday, July 14, 2014

Don’t fall victim to this confidence game

I like to spend time in northern Michigan during the Fourth of July holiday. At every stop along the way, from the local hardware to the stores my wife wanders into, I enjoy making small talk. During the course of the conversations I like to ask the simple question, “How’s business?”

Invariably, the response has been anywhere from swamped to overwhelmed. In other words, it appears the economy has turned the corner and people are once again opening their wallets.

That being said, there’s an interesting dichotomy at play. The economy may be gaining steam, but when you look at the Consumer Confidence Index, the numbers show there isn’t a whole lot of confidence in the economy.

The CCI now stands near 85. By contrast, it climbed as high as 144.7 during the boom. So, while the economy may be improving, people continue to lack confidence that it’s the real deal.

Although things are improving, it’s a far cry from where the economy stood back in 2009. From an investor’s perspective, the market hit bottom in March 2009, just over 5 years ago. And though it appears to be gaining momentum, the pocket book scars from recent years are still prevalent.

In order to survive, many households had to dip into their cash reserves and retirement savings just to get by. Even worse, many families lost their homes and were forced to reboot their entire financial life. For some, the hit was so severe they still haven’t recovered.

I bring this up because the current bull market is now over five years old. While a substantial number of households have seen their investment account values increase dramatically over those years, I suspect that many have not reaped the financial benefits of this bull market. And, quite likely, it’s because they just couldn’t afford to participate in the rebound.

My concern is that many households that have the financial resources simply choose to sit on the sidelines while the investment world continues to move ahead. I can certainly understand such fears; after all, the market plunge was the worst since the Great Depression.

So now, more than five years later, many investors have been rewarded with incredible growth in their investment accounts, while others sat idly on the sidelines and saw little or no growth.

They may have had the resources, but they didn’t have the iron stomach I continually point out that investors need. The bottom line is that they missed out on the entire journey, and I consider that to be very unfortunate.

Although they are strongly linked, the economy and the stock market do not necessarily move in tandem. The past five years are a good illustration. The economy was sluggish, but the market moved up. Some people invested and profited; some people didn’t have the iron stomach to invest and lost out.

Today, I believe there’s still a lack of confidence, even as the investment world continues to flirt with new highs and methodically surprises more and more people every day.

Nobody knows what the future will bring in the investment world. But I can say that the last five years have certainly surprised a lot of people and those that sat on the sidelines missed out on some significant gains.

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