Back to Basics

In response to my musings on the Index of Revolutionary Potential, “Karcher’s college roommate” has asked what I plan on doing about it. Fair enough, Bruce.

First, I’ll be making the maximum contribution to our IRAs in January. Rather than wait until the beginning of the following year (ah, the folly of youth) to make our annual contributions, it should be taken care of first thing in a new year. And with traditional IRAs we also get the deduction against earned income. The reasoning here is simple; the longer your money has a chance to be invested tax free, the better your chances of long term success in saving for those golden years (this as an option to saving for retirement).

Now this does not mean that all the funds are immediately invested. I’ll generally spread the (mostly) ETF purchases over the first couple of months of a new year. But don’t take my word for it. Take a look at a five-year chart of the S&P 500. Except for 2015, where the S&P ended the year where it started – around 2000 – the other four years saw nice returns from investments made early in the year. And of course, in 2016 the massive sell-off in Jan-Feb has been followed by massive gains into the close of the year.

More importantly, while lots of folks have anxiously waited for a big sell-off to get invested, the S&P has moved from about 1250 in January of 2012 to around 2250 as of yesterday. As we’ve discussed here many times, markets tend to go up more often than they go down – especially over meaningful periods of time. So if you want to do some “market timing” try timing your purchases to the times when you have money to invest. A smarter guy than me has some good thoughts on this topic (see Ritholtz link below).

Second, I won’t be paying much attention to the numbers on the dial. There was a lot of excitement when the S&P 500 cracked the 2000 mark for the first time back in 2014. And still, the S&P was at 2000 again this summer. Unless you are highly skilled in the alchemy of gematria, focusing on an index’s current numerical status isn’t so much help. It is more important to be aware of trends in overall market movements, where momentum can be a powerful force and not so hard to divine (see Seth Masters link below). This applies to both the main indexes like the S&P 500 and Dow Jones, but also to individual asset classes such as energy, technology or finance.

Finally, I’m going to be watching (as James Thurber put it) not back in anger nor forward in fear, but around me in wonder during January. Until there is a bit more clarity around what our incoming president will do versus what he’s said he’ll do, I’ll stick with the discipline of making those IRA contributions early in the year, but probably sit tight until February before wading back into equity markets. Which means I can spend some time thinking about asset allocation (to individual asset classes such as energy, technology or finance), another discipline that doesn’t always get the attention it deserves from individual investors.

  1. Barry Ritholtz has an interesting perspective, “I am always astonished when I hear that new market highs are a reason to avoid equities”:

http://ritholtz.com/2016/12/frothy-2/

  1. Solid reasoning from a reasonable investor, “But what we can say with confidence is that we will ultimately end up going through the 20,000 level more than once because there will be more volatility ahead”:

http://www.wsj.com/articles/the-dow-20000-man-sees-a-safety-bubble-1480907342

This Saturday, December 17, 2016 I’ll be featuring the music of Lee Morgan on the jazz radio show Straight Ahead, at 8:00 am (central time zone). You can stream it live via the internet at http://v6.player.abacast.net/2970, or play it back anytime during the week by accessing the archives at KRTU.org.

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One Response to Back to Basics

  1. Rick Grinnan says:

    nice reminder. great to see the small businesses excited. fewer regulations and dismantling of many regulations. crawl , walk and then invest

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