As investors, it’s always important that we look beyond the headlines to understand what is happening. A perfect example is the recently released unemployment numbers. The headlines on an article I just read pointed out that the unemployment rate had plummeted to 4.7 percent. That is a wonderful number, within the range many experts would say is full employment. Obviously, if our economy is at a point of full employment, which means everyone who wants a job can get a job, it is obviously good news. However, if you went beyond the headlines, you would realize that the May unemployment report was not considered good news for the U.S. economy.
You may ask, if the unemployment rate has dropped and we’re at virtual full employment, why would that not be good news for the U.S. economy? The reason is quite simple and that is the unemployment rate drop was not because more people are working but rather, because more and more unemployed Americans were frustrated in their job search and just gave up. Because they gave up and are no longer looking for jobs, they’re not considered unemployed. Obviously, that is not good news for the U.S. economy. In addition, when you dig deeper into the numbers you realize that the participation rate, which is the percentage of working-age Americans who are actually working, is at a four decade low. Clearly, that is also not good news.
It is important that as investors we don’t just pay attention to the headlines but rather, we dig deeper. This doesn’t just. apply to the unemployment numbers; it applies to all the numbers when it comes to the economy. For example, when people see that the Dow Jones Industrial Average has risen, most people make the assumption that the entire stock market has moved forward. Unfortunately, that is not the case. After all, the Dow Jones Industrial Average only represents 30 stocks and the way it is calculated, the majority of stocks within the index may have lost money and only a handful of stocks made money; but the entire index ended in positive territory. Therefore, it’s possible that an index such as the Dow Jones or the S&P 500 moved forward but your portfolio declined. That doesn’t mean you have a bad portfolio or that your portfolio needs adjustment. After all, the reverse is possible, where the index has gone down, but your portfolio has risen. Remember, as investors your goal is not to necessarily match an index and duplicate its results; rather, the purpose of your portfolio is to achieve your individual goals and objectives. That ultimately is the goal that you need to be focused on.
On a weekly basis we are inundated with financial numbers. Like most numbers they can be interpreted in a variety of different ways, depending upon the spin tt you want to put on something. That is why I always tell investors they have to read beyond the headlines. In addition, before you make an investment decision based upon economic numbers, it is important that you understand how the numbers are calculated and what it truly means. In addition, it is always important to remember that with so much economic data being released, the numbers can seem to be contradictory. Some reports will suggest that the economy is strong and growing while others will suggest the economy is weak. The key to investors is to understand what you’re looking at and when you make a decision to make sure that you’re not making a rash decision based upon one set of numbers but rather, you’re looking at a variety of numbers over a period of time.
As someone who manages money I never make a decision based upon one economic number. Rather, I try to look for trends and base decisions on a variety of numbers over a period of time. My recommendation to you is that you do the same. If you make a decision on your portfolio based upon one economic number, I think you’ll be making a mistake; and that is a mistake that will cost you over the long run.
Rick is a fee-only financial advisor. His website is www.bloomassetmanagement.com. If you would like Rick to respond to your questions, please email Rick at firstname.lastname@example.org.