On one hand, unemployment has fallen to 4.3 percent, the lowest level in 16 years. That’s good.

On the other hand, year-over-year wage growth has slackened to 2.5 percent, barely ahead of inflation. That’s bad. And despite full employment, people who lack in-demand skills find it hard to get a job. Government jobs have shrunk, and so have jobs in retail stores.

On the other, other hand, stock prices have soared to record highs. The S&P 500 has reached 2,439, a gain of 8.9 percent for the year, which sounds good. In addition, many people see great promise in President Trump’s proposed corporate tax cuts, which, supporters say, will spur rapid and continued growth in the economy. That would be good. But a look at past tax reductions offers little support for that hope. Even conservative economists are saying that large tax cuts may achieve little of their desired effect and rarely pay for themselves–and when they don’t, they set the stage for high levels of inflation, which would be bad. In short, we’re surrounded and beset by conflicting financial signals. It all makes me think of Harry Truman’s famous plea for a “one-handed economist.”

Faced with this kind of environment, what should an investor do?

My answer: Nothing major. You might want to exchange some of your U.S. stock funds into international stock funds, which are not so richly valued. Or maybe shift a little of your equity holdings into bonds. But making big changes would probably be a mistake.

If you’re correctly invested, changing your portfolio just to respond to current news is one of the worst things you can do–on two counts: The first is the common-sense reason that humans cannot reliably predict the future. I can’t, you can’t, and neither can the money managers who collect huge sums to do the impossible (see the About section of this blog).

What many investors don’t realize is that every time anybody buys or sells part of a portfolio, that person is predicting the future. If you sell stock A and buy stock B, you are predicting that B will outperform A. Otherwise, why do it? The same with funds, and the same with strategic moves, like liquidating your stock portfolio, because you think the stock markets are poised for a crash.

Data from Dalbar
The second reason to do nothing is a wealth of data indicating you are very likely to make the wrong moves. Dalbar, Inc., a research and advisory firm, has been proving that point for decades. Their research shows that active individual investors earn far less than the securities in their portfolio. How is that possible? It’s because investors tend to buy and sell at  the wrong times: They buy when markets are high (“the market’s going up!”) and sell when markets are low (“the market’s going down!”), a highly effective way  to lose a lot of money. One example: In a June 6, 2016, article, Dalbar reports that in 2015, the 2o-year annualized return on the S&P 500 was 8.19 percent, while the 20-year return for the average equity mutual fund investor was only 4.67 percent. (For more on this theme, see Chapter One of my latest book, The Smartest Way to Invest.

An exception
What I’ve just said does not apply to the case where you need to change your portfolio, because it doesn’t fit your current and future situation. Suppose, for example, you’ve kept your portfolio balance at 85 percent stocks and 15 percent bonds since you started working. But now you’re 61 years old and want to have more stability in your investments. In a case like that, it’s entirely prudent to rebalance your portfolio to a less aggressive posture. The big difference is that you’re not buying and selling in response to what somebody thinks is a smart way to respond to recent news.

Insulation
Whether your portfolio emphasizes stocks, bonds, or cash, there is no way to totally protect your peace of mind–or your portfolio–from the inherent volatility of the financial markets. But there is a way to achieve a substantial level of insulation from market action, both for your mind-set and your investments. The method can be encapsulated as follows:

Buy index funds
Buy total market funds
Buy global
Buy and hold

Why each of these tenets is a good idea–and how combining them may optimize your long-term investment return–is something I’ll cover in future posts. Stay tuned.

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