Sushi Money

Where’s your financial focus lately? Are you concerned about the economy? The stock market? Gas or food prices? Housing? Okay, for most of us- yes, all of that and more. It’s been a tough year so far and not easy to stay focused or optimistic in terms of financial goals.

Certainly the challenges in our life, or our perceived challenges, can really influence our psychological approach to each day. For many of us that’s especially true when it comes to money. And that’s also why consumer sentiment is something that economists (and investors!) watch closely. One of the most important indexes used is the University of Michigan Consumer Sentiment Index based on the Survey of Consumers. This index samples a number of households each month and asks about current and expected economic conditions. The type of questions asked are fairly broad, ranging from the individual’s personal economic conditions to his/her impressions of the overall business climate in the nation. Wikipedia shows that the Index is published with the following objectives:

• Obtain near time assessment of consumer attitudes on business climate, personal finance, and spending.
• Create capability for understanding and forecasting changes in the national economy.
• Provide means to directly incorporate empirical measures of consumer expectations into models of spending and saving behavior.
• Forecast the economic expectations and the future spending behavior of the consumer.
• Judge the level of optimism/pessimism in the consumer’s mind.

Lots of research mumbo-jumbo, but very important data. Bottom line- the survey of consumers and index data presents a wealth of information that helps economists and investors ascertain public confidence in the economy. Which has a direct correlation on spending and the strength of business throughout the business cycle. It’s interesting to look back and see how consumer sentiment has compared with past recessions, as well as with another trend such as federal interest rates. Here’s a chart of the same going back 30 years:

It’s not hard to see why so many people believe we’re facing a recession. But how does this affect us personally and what does it have to do with optimism? Over the past year my psychological investing mentality has shifted from optimistic to very defensive/ conservative. Does that mean anything practically speaking? Not really. Simply that I’ve become a little more risk-averse, but have continued to invest over time while shifting a little more money to cash and balanced funds while considering strategic opportunities. Overall I’ve stayed in the market investing in a diversified, low cost portfolio for retirement.

Does the word “optimism” signal unwarranted emotion that should be absent from any decision or action we make when speaking of investing? Some might say so, and if you’re trading I can understand a need for calculated neutrality. But I think optimism, and our psychological approach to investing is just as significant as it is to living our lives each day. I think it can be part of a fundamental approach to finding opportunity among chaos. It may be an inappropriate word for the short-term when talking about the economy or a particular stock. But optimism has to more with a mindset for how we approach life each day.

“A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty.”

Sir Winston Churchill

Admittedly it has been tough to stay optimistic at times over the past year. When most of us perceive challenge or pessimism we try to focus on more positive or constructive subjects. I think that’s a natural human trait, and very important in making constructive choices about the future. Equally however, when that happens it’s also important to make sure one is not simply ignoring the reality of a situation. There is a difference between a proactive choice to act positively for the future, versus wearing “blinders” without acknowledging risks or negative situations and doing something about it. In the face of so many negatives lately it has been a little tough find constructive choices.

But we can “stay the course” and maintain our goals. Sometimes that means doing nothing, and other times it means putting a little extra money aside for a rainy day and building up that emergency fund. It might even mean making a considerable investment in a key opportunity where others see nothing. For me it means “staying the course” with our goals. By “staying the course” I mean that I remain committed to saving and investing regularly via the 401(k), IRA, stocks and mutual funds. And no, I’m not a trader.

Many experts do predict continued economic weakness this year, but unless you think the financial world is coming to an end (and some do), stock valuations really have become very attractive throughout the market, with the long term price-to-earnings ratio as low as it’s been in decades.

With stocks of course, the short-term means very little. If we’re not in a bear market right now, we’re very close. But Walter Updegrave has written an excellent response to a question about the long term returns of stocks versus other asset classes. And he’s right- so much depends upon your measure of time for comparison of returns. Ten years isn’t enough in my book, especially considering that the long term historical average return from stocks is about 10% since the mid-1920’s. Personally I think 7% is a better number going forward. The comment trail on that post is excellent by the way, and “Jim” puts a rational face on our financial pursuits:

“There are several ways to make money. One adage is to buy low and sell high. There are lots of high quality stocks that are good deals right now. And if you add in the dividend, then you make money even when the stock is down. I’m taking those dividends and buying more stocks with good dividends. It just keeps compounding regardless if the stock is up or down. When the stock is down, I can buy more. The more things change, the more they stay the same. I remember the 90’s with the new economy. Everybody said that this time it was different. But it wasn’t . Same thing with the recession in the early 90’s. Everyone said it was different, but it wasn’t. Some recessions are more severe than others. But the economy goes in cycles. It always has, and it always will.” Posted By Jim

‘Ole Jim is right! As hard as it is to stay upbeat in the face of recession fears, housing challenges, a down stock market, etc it’s simply the cycle we’re in right now. We also see that some economic pundits are now worried about Stagflation? I haven’t heard that term in a long time. Some of these folks see a lot of parallels with the 1970’s. I remember as a kid waiting in the car in a long gas line for our turn at the pump. People didn’t drive nearly as much back then, but there were real fuel shortages across the nation. Can it get that bad today? Maybe so, but if we get to that point again we’re really in trouble.

We do face challenges, there’s no question about it. One area of the economy that has been crazy over the past year is food prices. When food prices strike the average consumer as excessive, then inflation has become a real factor in the economy. The other day I was in Costco and the price of eggs has almost doubled in the last month! What’s up with that? Something to do with grain and other commodity prices I’m sure. Nationally I’ve read the price of a dozen eggs has risen from an average of $1.19 to $1.92 per dozen over the past year. Costco sells a double pack of 36 total eggs that used to be $2.99. A good price, but not exceptional for Costco. Yet as of Tuesday this week those same 36 eggs cost $4.99! Holy omelet Batman! At this rate it may be time to buy a few chickens.

Of course as Laura Rowley discusses, everything is relative:

“Relativity makes us do weird things,” Dan Ariely of MIT says. “We might not think twice about paying $3,000 to upgrade to leather seats in a $25,000 car, but we won’t spend $3,000 on a new leather sofa — even though we might actually spend more time couch surfing than driving. We’ll add $200 to the cost of a $5,000 renovation project for upgrades, but also clip a 25¢ coupon for a $1 can of soup.”

Is it the same way with eggs? Sure. What about stocks? Absolutely… it’s just that I want my retirement to be relatively comfortable. To get there I need to stay on track, keep saving and make constructive choices. I think keeping an optimistic mindset helps us do that, especially among the uncertainty of the challenges we face.
I strongly believe in the long-term strength of our nation and economy. We set financial goals and do our best to minimize debt and keep saving money. We’re getting there, although sometimes it seems like one step forward and two steps back. But it’s all learning isn’t it?

“What is important is to keep learning, to enjoy challenge, and to tolerate ambiguity. In the end there are no certain answers.” Martina Horner

Maybe there are no certain answers to the questions we ask. But in uncertain times, we can choose to do something about our future! Best regards-

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