STREETWISE FOR SUNDAY SEPTEMBER 12, 2021

Based on my email inbox, many of you are concerned about the future of the financial markets. Please keep in mind that old guiding principle of successful long-term investors, it is time in the market, not timing the market that should guide your investment decisions.

The impressive compounding of investment returns is only possible if you remain invested. At the same time, trying to pick a market's top or bottom is a fool's errand.

The onset of the pandemic in March 2020 caused near panic among many investors. However, those who sold out at the bottom of the market found it to be an expensive mistake.

There are four months to go until year-end, and the bulls feel emboldened while the bears still remain hushed for the most part. Whether the rally continues depends on everything from the Federal Reserve's handling of the taper plan to geopolitics to the infection rate of the coronavirus.

Meanwhile the S&P 500 close out a seventh straight monthly rally. According to Bloomberg, in the 18 times that has happened since 1929, stocks rose 10.2% on average 12 months out. The figures were positive in each of the past six cases; the rare declines reached double digits only twice.

Drilling down deeper, our economy, as is the case with every modern developed economy, follows a cyclic path often referred to as a business cycle. Translated this means that the country’s gross domestic product will fluctuate with short-term trends while still maintaining a long-term growth trend.

Contrary to what some would have you believe it is impossible to forecast with any accuracy when the current stage of a cycle will end, and the next stage begins. At the same time, it seems bizarre to many that the stock market is doing as well as it is.

There are several reasons, though none is directly connected to the economic value of companies, the traditional method by which market prices are measured.

The Federal Reserve Board's injection of trillions of dollars into the nation's economy has been a key factor in aiding the economy, while low-interest rates encourage borrowing, which generally leads to economic growth.

The low rates, hereto thought of as “reasonable returns,” means that the equity markets have been the only place to find returns that are considered reasonable by many investors.

While recent years has seen most stock trading being conducted by large institutions, recently individual retail trading has not only increased but appears to have gotten a bit out of hand.

With too much time on their hands from being home-bound, novice day traders try to score that ever elusive large gain as the markets continue to rise. No-fee trading apps add fuel to the phenomenon.

None of this means stocks will continue to rise forever. In fact, the longer stocks are propped up by factors unrelated to the actual health of companies, the greater the potential for an eventual downturn. Low rates and Fed purchases will eventually end.

Will next year have us wallowing in a bear market. No, I do not believe so. Yet, a "correction," if or when it comes, is not the end of life as we know it. With the Fed reining in the supply of cheap money and interest rates poised to rise, companies will need to up their game.

At the same time, it will become easier for you to distinguish between companies whose margins are driven by solid business models, growth prospects, and effective management teams as opposed to those who have relied too heavily on low-interest rates to artificially buoy profitability.

You can exploit the ensuing volatility that is likely to occur for building positions in companies that have long-term staying power in the changing environment.

It might sound counterintuitive, but there is really no reason to panic during any downturn. Corrections are one of the best times to add to your portfolio. And over the long term, maintaining a strategic position in equities has been shown to be the most efficient way to preserve purchasing power.

By bracing for a correction and understanding that they are usually of a short-turn nature, you will gain the necessary confidence in your research abilities and will be rewarded for your patience and due diligence. However, you must do what everyone else is not.

Success comes from capitalizing on the emotions of the crowd, thereby taking advantage of the fear and greed in others.

Lauren Rudd is a Managing Director with Raymond James & Associates, Inc., member NYSE/SIPC. Contact him at 941-706-3449 or Lauren.Rudd@RaymondJames.com. All opinions are solely those of the author. This material is provided for informational purposes only, is not a recommendation and should not be relied on for investment decisions. Investing involves risk and you may incur a loss regardless of strategy selected. Past performance is no guarantee of future results.