By Jerry Lynch Now, here is why I’m concerned! Maybe I am just getting older and seeing things in a more pessimistic way …who knows. I am speaking with clients that are not happy that the returns are not in line with the three major indexes, and I get that. My concern is that client expectations have radically changed in the past 6 years from “try to minimize losses”, to “we need to get higher returns”.
Yes I get it, everyone always wants more. What most people do not understand is that my job is to worry for my clients, to keep them from acting emotionally and help them make smarter decisions with their money. Here is what worries me.
Valuations- right now the S&P trades a little above 20x earnings. The historical average is around 15.5x. This is telling me that verse the average, stocks are selling at much higher multiples. I use historical averages on almost everything (mortgage rates, stock prices, even gas prices) to figure out if things are expensive, or cheap. When pricing is below the historical averages, it is a buying time. When it is above the averages, it is time to be very cautious.
Think like a Retiree- most retirees plan for retirement was to have a certain amount of money, let’s say $1 million, put it in a bond fund or CD that pays 5%, get $50k annually in income (without touching principal) plus social security and live happily ever after. The problem is that those CD’s are renewing at .5%, and now generate $5k in income. The options are to either eat into principal (which freaks them out), or take more risk by investing in the market, which is what has happened. This has driven up stock prices but sooner or later when interest rates rise, this money will go back to the more conservative investments. That generally causes the market to drop.
Real Unemployment- What is reported as unemployment numbers and what is real unemployment (referred to as the U-6 rates) are not even close. The U-6 rates in 2007 were around 8.3% and the current U-6 numbers are over 11%. The U-6 rates include people who have stopped working because they could not find a job, are underemployed making a lot less than they were, or who are working part time. In the current government reporting, if you work 1 hour per week, you are considered employed. These U-6 numbers are still substantially higher than in 2007, which shows that the unemployment is actually worse not better.
We are the prettiest dog out there. Europe has major issues, Russia is tanking, and very few areas in the world have real economic growth. Investing in the US because we are the “least bad thing out there” is really not a very compelling reason to invest. At some point that plays out and investing in something because it is the best of the worst is not a great strategy.
Low interest rates- having interest rates at 0% held artificially for years is not a great thing. It causes the stock market to rise but it is not real. This will definitely have an impact when interest rates are not being held artificially low.
We have had a 6 year great run- the average bull market lasts 67 months (Shiller 2013), and we are now in month 72. The average negative year in the stock market gives you a little worse than a negative 13% return. A bear market is a correction is at least a 20% drop from the market highs. It is simply reasonable to assume that there can be a correction in the market.
So what should you be doing?
Have a consistent approach to investing. Selling when the market is low and buying when the market is up is not a great long term approach. To get the average returns, you need to remain consistent.
Reconsider your allocation- in the past 6 years, stock prices have gotten a lot higher and it is very possible that you a higher stock allocation (and thereby more risk) then you were previously. Maybe it is time to take it down a notch, especially if you are close to retirement.
Reconsider your portfolio- I meet with people who do not know what they are invested in, do not read their investment statements, and have not made changes in their portfolio for years. You need to look at this every once in a while and understand what you are doing.
Continue to invest! Your least “risky” money is the dollars you invest today, and the most risky is the money you have invested today. If the market goes down, your invested dollars drops and there is no benefit to you at all. If the market drops and you continue to invest, you are buying at a discount and it works to you advantage.
So I really do not know if the market will go up or down from here, but I am concerned. At least I’m honest about that!