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How the Market Works, Semi-Retired

Investment Selection: Just Walk Away

Posted by kdadmin on July 8th, 2015.

Investment Selection: Just Walk Away

In most any other market cycle, you’ll find me beating the drum of proper investment asset allocation for a given market cycle. I’ll talk about things like systematic vs unsystematic risk, covariance and standard deviation in an effort to shove one more bit of actionable data into your head.

But not today.

Today, I’ll just walk away. Today, I’ll take the advice of Kjell Nilsson of Mad Max fame.

Have a look at the graph above. Each of those tickers is an ETF that attempts to peg a certain market index. For orientation’s sake, I’ll identify the market index that each ETF targets. SPY is S&P 500, IWM is Russell 2000, AGG is Aggregate Bond, CMR.TO is Money Market, VGK is FTSE Developed Europe, VNQ is REIT (real estate), TLT is Long Term Treasuries, GLD is gold, and XLK is Information Technology.

There is a reason that we dumped our equities in late February. Look how these ETFs have done since then. In a word? Crappy. Only IWM, the Russell 2000 Small Cap ETF, showed any gain at all, and less than 1% at that. Given that the small cap segment is often much more volatile than the S&P 500, there is no way that a sub 1% return is going to urge me to invest.

Now consider what you learned in my three part series, The Stock Market Warnings.

  1. Quantitative Easing, largely responsible for driving up the prices of stock, has ended.
  2. Since late 2014, the S&P500 has struggled to make progress, being up just under 1% in 2015.
  3. An increase in the Federal Funds Rate is bad for corporate earnings, and by extension, stock prices.
  4. The Federal Reserve has indicated it will likely BEGIN to raise the Federal Funds Rate in September.
  5. Stock PE Ratios are at historical highs, limiting the risk premium over safer investments.

In addition, consider the following:

  1. GDP went down in the first quarter.
  2. Unemployment is flattening outaround 5.3%.
  3. Europe has enacted a QE style program of its own.
  4. Oil prices are less than half of what they were a year ago.
  5. Russia is hemorrhaging cash and Greece has defaulted on its IMF debt.

Check your gut. Does this sort of data make you excited to invest? To sock your life savings into an investment that has a history of dropping 56% in a year (S&P 500 in 2007-2008) and that has made less than 1% this year? Or, how about a long term treasury bond that is supposed to be a “safe haven” but is down nearly 9% in the last four months?

I hope not. When I looked at these data points I posted, And We’re Out of Stocks. My bond stake is an opportunistic play, not simply a defensive play. If stocks get pounded, bonds will likely do better, and will pay me a nice dividend in the meantime. But that doesn’t mean it will be like this forever … This is how the market works.

This market, right now, is easily among the most dangerous for amateur investors with high hopes and looming retirements. These people want to make money NOW. They want HIGH returns because they want to retire SOON. It’s extremely difficult for them to sit out for a few innings even when all the warning signs are there. They say things like, “I’ve done really well these past several years. I don’t need to do anything different. The market may go down, but it always recovers.” They couldn’t be more wrong. They don’t consider the risk.

The reason I’m foaming at the mouth about getting out of the stock market is not because of fear, but because of opportunity. I want to be the guy that has the liquid cash to invest when the market bottoms out after finally correcting itself. I want to Hunt the Black Swan. And so do you.


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