A Knight's Tale

02/20/2004 12:00 am EST


Knight Kiplinger

Editor-in-Chief, The Kiplinger Letter, Kiplinger's Personal Finance, and Kiplinger.com

While most of the speakers at the Opening Ceremonies of The World Money Show discussed markets abroad, Knight Kiplinger represented the US markets, offering an exceptional overview of the economy, the market, investor psychology, and the value of long-term investing.

"We live in the future. When you read the news, the news is past. When you read about economic statistics that were just released by the government, it's history. As prognosticators, we are trying to write the history of the next six months, or the next year. We talk to people in business and investing, asking their intentions. Not what they've already done, but what are they planning to do. And from this, we try to project what lies ahead for America. Remember a few months ago, the papers were filled with the dreaded 'D' words- a downward deflationary spiral, a double-dip recession. The brief recovery was over and we were going to enter a contraction. And yet, the people we were talking to were talking about a surge in business and consumer and the government spending, which has come to pass.

"So what lies ahead right now? To figure out where the US economy is going, you have to look at the intentions of the four key players who buy what America produces. Those four key players are the consumer, business, our overseas customers who buy our exports, and government. Consumers are doing fine. There is a little bit of slowing in the fourth quarter, but personal income is still growing. The refinancing boom of the past few years-some $200 billion of refinancing- have moved into retirement and investment savings. What about business? Well, we now know that business spending is back. After several years of deferred capital investments, we see business spending returning to a normal level. Perhaps not the excessive spending of the late 1990s, but indeed, a normal level. What about overseas buyers? Due to weakness in the US dollar and due to the quality of what America produces, exports are growing strongly, after quite a slump. And what about Uncle Sam? The US government is spending money like a drunken sailor and has been for the last year or so.

"What is the investment outlook from this economic climate? Stocks surged last year because profits surged. And in the end, it is profits that count first and last for the level of stock prices. But last year, as quickly as earnings grew, stock prices grew even faster. That means they got a little overpriced. Prices have gotten a bit ahead of earnings. That means that this market-which has not corrected as much as 5% in the past ten months- is now nearing one of its most lengthy correction-free rallies of the past half century. So we shouldn't be surprised if there is a pullback over the coming months. That's what happens. Its part of history, particularly when stock prices get a little ahead of earnings growth, as they have recently. A correction will be a buying opportunity. Within your investment choices, we would note that the 1990s was the decade of index investing. A rising tide lifted all boats and the indexes beat most actively managed funds. Now, I think the reverse is true.

"We are also advocates for value investing, and have been for over 50 years. The key to long-term investment success is to have a plan, keep a cool head, and stick to that plan. Asset allocation is so important. Find the mix of stocks, bonds, and cash equivalents that is right for your risks, right for your health, right for your tolerance, right for your age and stage of life- and stick to it. For example, in 1999 and early 2000, if you were following a rigid asset allocation of 60% stocks, 30% bonds, and 10% cash, as the stock component of your portfolio soared in the late 1990s, you would have been forced to lighten up on equities and put more money in cash and bonds, because the market had sent your asset allocation out of kilter. Likewise, two years ago when stocks were in the toilet, and bonds were becoming overpriced and had risen above the 30% level of your portfolio allocation, then this same formula would have forced you to be selling bonds and buying stocks. It's an autopilot way to invest and it works darn well.

"And speaking of autopilot, don't try to be a market timer. Don't try to time the peaks and valleys of markets, because it doesn't work. Nothing beats good old boring dollar cost averaging, if you have the patience to buck the lemming-like investor trends of fear and greed. When others are greedy, remember to turn a little more cautious. When others are despairing that stocks will never rise again, that is the time to be more bold. But what about the scandals? Didn't this ruin investor confidence? For most investors, the biggest barrier to investment success is not someone else's behavior, but their own behavior. Don't get caught up in euphoria or despair. Those are passing emotions, and they are your enemies.

"Over the next decade or so, the outlook for the economy is excellent. Look at the aces up our sleeve. We have the best research and development in the world. The best higher education in the world. We have an openness to the economy, an openness to new ideas, to new technology, openness to foreign talent and immigration, and openness to foreign capital, which is a blessing to the economy. We have the lowest cost of living in America and therefore, the highest standard of living in the world. We have an entrepreneurial zeal that is unmatched in the rest of the world. Sure we have a lot of problems and we always have. We shouldn't be complacent. These are amazing times, or in the words of the famous Chinese curse, these are interesting times, where danger and risk are equally fraught with opportunity. The future belongs to business people and investors who are calm and dispassionate, who are adaptive, who are nimble, and who are creative. I hope you will be among the calm, dispassionate people who will prosper in the interesting times ahead."

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