May 2023 Newsletter: Not Everything Important Matters

One of the biggest challenges in investing is remembering that not everything important matters. There are lots of global geo-political and social events that are extremely important to societies, especially when they directly affect you but the truth is a lot of them simply do not matter for your investment portfolio.

I’m not saying that you shouldn’t care about them or ignore them, just realize that a lot of them simply don’t have much of an affect on your investments one way or another. Sometimes it shocking how little some things matter to investments.

For example, let’s say that a year and a half ago I told you the following. Russia would invade the seventh largest country in Europe. There would be an all-out war that would grind on for over at least a year with hundreds of thousands of casualties and no quick end in sight. Almost every major country on the face of the earth including almost as every NATO member country would be involved in supplying weapons to at least one of the combatants.

Obviously, this is a huge geo-political event that is extremely important. It’s definitely something you may care deeply about, especially for those in Russia or Ukraine! Except that when it comes to the impact on the markets it was barely a blip when it started and the long-term impact has been almost nothing. Outside some volatility during the first few weeks the impact has been pretty much nothing. The market dropped a bit before coming back and was driven mostly by pre-invasion inflation and interest rate concerns. There was an initial spike in oil prices but oil is now about 20% lower than pre-invasion. The stock market has been basically even money with ups and downs being driven by the Fed and interest rates.

Let’s take another example that people have very strong opinions and beliefs about, firearms. Suppose the US severely restricted new firearm so much so that new gun sales are almost now non-existent. I bet it’s something you would feel very strongly about, care deeply about, and given the number of outdoorsmen and gun collector clients I have something that would affect you deeply. So definitely something you would care about. But the effect on the stock market would be basically nothing. 6,500 employees laid off and .007% of the stock market value wiped out. That’s it. Again, something that is extremely important in our lives as people, but just doesn’t matter from the perspective of investing.

To understand why so many things just don’t have an effect on investment, it’s helpful to understand two things.

First, there are many things that happen in the US economy automatically or at least close to it (depending on budgets). Social security payments go out regularly. Medicare and Medicaid payments go out. Defense department payments to both contractors and employees happen regularly. Things like private health care spending and education spending remain mostly constant. Right there we have about a third of the US economy that is essentially on autopilot and happens everyday regardless of almost every world event outside of Congressional budgeting and long-term demographic changes.

Second, the stock market functions as a huge zoomed out view of the US economy. Think of the stock market as being in a plane thousands of feet in the air. You can’t see any details on the ground. The same with the stock market, many details (while perhaps important to you) just aren’t to the market.

When analyzing things, it’s important to take a step back, look at the big picture and ask am I and most people I know going to truly change their behavior because of this

• Am I going to cancel my Netflix subscription (or is the friend or family member whose account I use going to cancel their subscription)?
• I’m I going to cancel the dinner plans I made with friends for this Friday?
• Am [I, my child, grand-child, etc] going to drop out of college because of this?
• Am I not going to buy groceries this week?
• Am I going to skip my mortgage payment?

It’s why over the long term the corporate earnings graph for the stock market goes up and to the right. It’s why the stock market graph goes up and to the right. It takes a lot to start answering “no” to those questions for millions and millions of Americans.

I’m not saying you shouldn’t care about what is happening, just that it probably won’t directly affect your portfolio. The one caveat is that if there are certain companies or industries you don’t like or agree with we can certainly make adjustments to your portfolio at an individual level and sell or substitute one stock or bond for another.