As we navigate the complexities of our modern world, some developments seem predictable, such as financial crises, while others, like geopolitical tensions, emerge unexpectedly. Yet, much of what influences our financial choices remains hidden. There are countless factors we are unaware of, creating layers of uncertainty in the stock market.
In Donald Rumsfeld’s famous words, there are “unknown unknowns”—things we aren’t even aware that we don’t know. Identifying these potential risks is nearly impossible, and if they were recognizable, they would cease to be “unknowns.”
However, once we become aware of certain insights, it becomes essential to evaluate them and take appropriate action. Amidst the overwhelming noise from the stock market, many everyday investors wonder how to approach retirement savings effectively.
One straightforward choice could be to take no action. However, opting for inaction is, in itself, a decision with consequences.
For instance, placing funds in a savings account is a commitment to the banking system, while hiding cash under a mattress effectively bets against inflation. Purchasing government treasuries demonstrates faith in credit markets and the belief that the government will honor its obligations.
A Reliable Way to Build True Wealth
The reality is, no matter which path you choose, you are inevitably making a decision. So, if action is necessary, how should you proceed?
A solid starting point is to adhere to Warren Buffett’s two essential investing principles: Rule No. 1: Never lose money. Rule No. 2: Never forget Rule No. 1.
Of course, this may seem simplistic. Even Buffett himself has faced losses in the stock market. The critical takeaway is that investing in stocks should be seen as a calculated strategy rather than mere speculation.
According to Buffett, investments should target sound companies at reasonable prices. This approach enables investors to hold onto their stocks during market downturns, ultimately leading to substantial rewards over time.
Buffett once remarked, “Lethargy bordering on sloth remains the cornerstone of our investment style,” in his 1990 letter to Berkshire Hathaway shareholders. Although this method may not provide immediate gratification, it consistently fosters investment wealth over the long term.
Unfortunately, in the current climate, one must also consider the implications of Federal Reserve policies and their impact on market dynamics.
How the Stock Market Doubled
Frankly speaking, this situation is troubling. The Federal Reserve’s lenient monetary policies have transformed the stock market into something akin to a casino. Investors now face the additional challenge of navigating Federal influences while searching for fundamentally sound investments.
A headline from CNBC summarizes the current reality: “Stock Market’s Three-Year Rally Has Fed to Thank.”
Despite ongoing economic struggles, the stock market has astonishingly more than doubled over the past three years. Here’s how this transpired:
“During the nearly three-year surge, the S&P 500 peaked at 1,370 in May 2011. This occurred just before the end of the Fed’s second quantitative easing program, known as ‘QE2,’ which concluded in late June. Under this initiative, the Fed purchased $600 billion in Treasury securities to lower interest rates and encourage investment in riskier assets, like stocks.
“From May to early October, the stock market faced declines amid a contentious debt ceiling debate in Washington and uncertainty surrounding economic conditions in Europe.
“The S&P hit a low of 1,074 in early October, coinciding with the launch of another Fed initiative, ‘operation twist,’ where the Fed bought longer-term Treasuries using the proceeds from shorter-term securities.
“Since then, the S&P 500 has increased by over 22 percent.”
In essence, the stock market’s incredible rise can be viewed as somewhat deceptive. Similar to past bubbles in housing and technology, such phenomena often persist longer than anticipated and rarely conclude favorably. In the meantime, investors are in for an intriguing journey.
In conclusion, navigating the stock market demands cautious deliberation and an understanding of both known and unknown factors. While investors may feel overwhelmed by external influences, employing sound investment practices can pave the way to financial success.
Sincerely,
MN Gordon
for Economic Prism
