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Trees Don’t Grow to the Sky

February 1, 2018

The market is on a tear and suddenly everyone is an expert on the economy.


The reality is that the stock market will not continue to go up forever – trees don’t grow to the sky. At some point, the market will pull back. The pullback may come from external shocks on the market, e.g. N. Korea, a naval confrontation in the South China Sea, or maybe something in Crimea. The pullback may come from internal shocks to the market, e.g. Congress action/inaction, Federal Reserve Bank action/inaction, an asset bubble someplace in the system, or everyone finally realizing there is no Santa Claus in Washington, D.C. Whatever the shock, the market will pull back. The trouble is predicting when.

 

Warren Buffett is famously quoted as saying that his favorite holding period is forever. If you make an investment, it is for the long term. Ultimately, not all investments pay off, unfortunately. Buffett notes in his annual letters to his Berkshire Hathaway shareholders that he has made some stupid investments he cannot, in hind sight, even justify. Nonetheless, investments must have a life of some time to pan out or not.


So the “new” old parlor game for 2018 is trying to figure out the financial future. Once you figure out the financial future, please tell me how the 2018 midterm elections in November will turn out. 


The best financial hedge against the future is personal financial stability. That means, first of all, do you know what you have? In Chapter One of my book Making Sense on the Dollar, I strongly suggested that you make a personal financial balance sheet. Assets are recorded at their estimated market value. Liabilities are recorded as the amount still owed. The calculation of assets minus liabilities is your financial net worth. The goal of financial planning and investment management is to increase that net worth. If you don’t know your net worth, how can you tell if your financial situation is improving or falling back (the stock market notwithstanding)?


After doing our taxes each year, I update our personal financial balance sheet. It is gratifying to see that net worth number (usually) inching up from the actions we have taken during the year. Investing and financial planning are not exciting. It is like watching paint dry. You only notice the improvement over time when this year’s personal financial balance sheet is compared with last year’s balance sheet. 


It is not about “what’s in your wallet?” but what is your net worth. Now that the New Year’s Resolutions have fallen by the wayside, resolve to do two things forward looking: a) calculate your net worth, and b) do something this year so that next year, in 2019, you will see the net worth number move up. 


I asked Riley, the Golden Retriever with whom I share an office, about her net worth. She cocked her head and looked at me whimsically. Net worth? How about “priceless”.


Yes, there are many assets that you cannot put a price on but don’t let that stop you. We work with the financial resources we have. Everyone starts some place. 


All the best in 2018.
 

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