By yields, stock correlations, sector performance, and factor investing.

By
Peter C. Golotko, CPA/PFS, MBA, and Matthew Treskovich, CPA/PFS, MBA, CFP®, CMA

Published
January 4, 2018, by Lakeland Ledger.

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Become
a Better Investor: Use Walking Around Sense

In the world of investments, there are
many highly educated people who spend their days studying every data point you
can think of. They look at things like bond yields, stock correlations, sector
performance, and factor investing. They study economic factors such as unemployment
and gross domestic product, as well as monetary factors like interest rates and
inflation. Then they combine these factors and others into complicated
predictions that most of us have trouble understanding. Fortunately for the
rest of us, it doesn’t take an advanced degree in economics or finance to figure
out how the economy is doing, and what that means for the stock market.

Sometimes
simple ideas are the best ones.

Stock market indexes like the S
500 and the Dow Jones Industrial Average track the performance of baskets of
individual companies. These companies make money by selling products and
providing services. Long term investment returns are driven by the ability of these
companies to make money. When the economy is good, it’s easier for these
companies to make money and long-term investors should do well.

The best way for individual investors
to understand how the economy is doing is to use “walking around sense”. Spending
some time watching what people and companies are doing can give you a good
sense of how the economy is doing. When people are optimistic about the future
and willing to spend money, companies will have higher profits. Higher profits
ultimately benefit the investors who own those companies.

Economists talk about the unemployment
rate, the labor force participation rate, payroll numbers and productivity
measurements. The walking around sense alternative is to ask yourself how many
people you know who are out of work? Are you more likely to get laid off, or
jump to another company that’s offering better pay or benefits? It also helps
to look around and see whether companies are hiring or planning layoffs. When
companies must work hard to find hard workers, it’s generally a good indicator
that the economy is strong.

Another measurement economists like to
talk about is the “velocity of money”. Velocity describes how quickly money
earned is put back into circulation by being spent or invested. When people are
confident in their ability to earn a living, they will spend more. Similarly,
when businesses have an optimistic outlook, they will invest more. Both of
these activities increase the velocity of money, and overall economic activity
is higher. More velocity means more economic growth, which is good for the
stock market.

Investors can get a good idea of how
the economy is doing by using “walking around sense” and looking at what people
and businesses are doing. When restaurants are full, shopping malls are packed,
and companies have to advertise their job openings, it’s easy to understand
that the economy is doing fairly well.  A
strong economy is good for everyone – especially long term investors.

 

 

Peter C.
Golotko is president and CEO of CPS Investment Advisors. Co-Author, Matthew
Treskovich is the Chief Investment Officer for CPS Investment Advisors. Stay
tuned to The Ledger for future installments of the Better Investor series.

 

 

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