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Try as we might, we cannot contemplate every specific way in which economic factors might affect our investments. However, we can develop an understanding of the interconnectedness between general economic factors – on a national and global basis – and the best way in which to construct our investment portfolios.
An interesting example might be to look at the price of oil and the performance of the stock market over the last period of time. Many economic pundits and commentators have stated that the fall in the price of oil has been one of the leading factors in having the stock market trend downward.
We might choose to argue about this. We could say that oil trended downward because of weak demand and that demand was weak because of a weak economy. We could also say that the stock market declined because the economy was weak. And so, we might point out that the declining price of oil did not so much act as an impetus for the stock market to go down, but was merely a precursor to a market decline which itself was predicated on a weakened economy.
However, does it make a difference? Isn’t it true that what we are after is strong and steady positive growth in our portfolios? Should we really strive to understand a bunch of economic chicken and egg questions, as to what came first and what caused what? I suppose it depends on our personalities.
Some of us want to know why things happen. When it comes to our money, though, I suspect all of us want our money to work as hard for us as we work for it. There are those of us who want to understand how general economic conditions affect our investments. However, all of us want our portfolios to perform well.
Considering that there is often disagreement between economists and economic pundits as to what is causing a certain economic trend, it makes sense to me that we should not try to outguess the economy when it comes to making our investments. Yet, we can be analytical and use common sense; constructing our investments according to time tested principles.
Chief among these principles is diversification. I like to talk about an investment portfolio as a beautiful mosaic. We have all seen mosaics. A mosaic is composed of small pieces. While each piece may have an attractive color, it is the picture they create, laid one next to the other, that may make a masterpiece. This is a case of the whole truly being greater than the sum of its parts.
An individual component of an investment portfolio might not perform in the face of certain economic factors. However, if we adhere to a philosophy of diversification both among and within asset classes, we have a far better chance at having our money grow than if we put all our eggs in one basket, or all our baskets on one truck.
Once upon a time, economic talking heads claimed skyrocketing oil prices were negatively affecting the stock market. Now, we have heard that declining oil prices have negatively affected the stock market. In real time, who exactly knows? In each case, and within context, the individuals giving the explanations might be right. What should matter to us most, though, is that we construct our investments in such a way that we are diversified and not held hostage by a particular set of economic events.
The key to building a beautiful mosaic is having vision and the desire to actually make that vision into a reality.
Scott McGimpsey- March 2016
This material was prepared by Scott McGimpsey and does not necessarily represent the views of the presenting party, nor their affiliates. All information is believed to be from reliable sources, however, we make no representation as to its completeness or accuracy. Neither Summit Brokerage Services Inc. nor Scott McGimpsey is engaged in rendering legal, accounting, or other professionally services. If such assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any federal, state, or municipal tax penalty. Moreover, a diversified portfolio does not assure a profit or assure protection against loss in a declining market. UNIFIED PLANNING GROUP is an independent firm with securities offered through Summit Brokerage Services Inc., Member FINRA, SIPC