Tell people you are an investment analyst, and you’re bound to hear the same question over and over: “So what do you think about this market?”
“I try not to,” I often reply.
I’m not being flip. Most investors spend far too much time obsessing over the market.
Is it overvalued? Is it undervalued? Will the bull market continue? When will it end?
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There are no good answers to these. Why? Because they are not good questions.
Let me explain…
Imagine that a friend made a commitment to greater wellness by eating healthier.
As a result, he spends several hours a month thinking about the grocery store.
Is it close enough? Are the prices too high? Is the selection broad enough? What days are they open? When do they close?
This, of course, has absolutely nothing to do with eating healthier.
He shouldn’t study the grocery store. If he wants to get healthier, he should study what to buy at the store.
My friend John Mackey – founder and chairman of Whole Foods Market and bestselling author of The Whole Foods Diet: The Lifesaving Plan for Health and Longevity – suggests that if you want to live the longest, healthiest, most disease-resistant life possible, you should eat a 90% plant-based, whole foods diet.
(That’s whole foods vs. processed foods, not Whole Foods vs. Safeway.)
There are mountains of scientific studies to back him up.
And if you want to be healthier still, you should eat across the spectrum. Not just strawberries, for example, but blueberries, raspberries and blackberries. Not just lettuce, but onions, peppers, beets, tomatoes and cauliflower. Not just peanuts, but walnuts, pistachios, hazelnuts and macadamias.
John would prefer that you bought these at Whole Foods. But he would tell you that’s not the most important part of your decision.
What really matters is what you consume.
The same is true in investing. Rather than fretting about – or trying to outguess – the market, devote your limited time to considering which stocks to own.
After all, if you’re going to live that longer, healthier life as a result of all those nuts and berries – and 10,000 steps a day – you need a portfolio that doesn’t kick the bucket before you do.
What should you buy to promote your financial health?
Great companies with rising sales and earnings, increasing market share, and sustainable margins protected by brand names, patents and trademarks.
You want companies with sound management, reasonable (or no) debt, high returns on equity, low valuations and – ideally – significant insider ownership.
And just as you should diversify your plate, you need to spread things around in your portfolio. You need large caps and small caps. Growth stocks and value stocks. Foreign companies and domestic ones.
Diversification lessens your financial risk because these asset classes don’t all move in the same direction at the same time. (In technical terms, when some zig, others will zag.)
It also gives you a better chance of owning a big outperformer.
That’s one of the benefits of indexing, in fact. You’re guaranteed to own all the best-performing stocks.
(Of course, you’ll own the worst performers too. That’s why the highest returns are generated in concentrated portfolios rather than broadly diversified ones.)
When you start planning dinner for tonight, I know you won’t begin by researching the Piggly Wiggly.
And to enjoy a long and comfortable retirement, you needn’t obsess over the S&P 500 either.
What matters most is not the market. It’s what you buy in it.