Posted by kdadmin on December 31st, 2015.
Happy New Year!
Let’s kick the new year off right, and cut the crap.
For all its drama, the S&P 500 went exactly nowhere in 2015. That’s right, 0%. You could have kept your money in cash and done as well, with no risk all year. Some of us did just that for large parts of the market cycle. For example …
So, it’s happy new year, alright. Especially for my investment clients. Here’s why …
It’s VERY difficult to make money in a flat market. Most people think the “best” investment strategy is to buy and hold forever. Which is great. If you never need the money (Warren Buffet). But if you’re retired, or hoping to be retired, you’re going to need to spend that money sometime before forever. Which means, you’ll have to sell. Which means, you REALLY hope you don’t have to sell at the bottom of a stock market cycle.
What usually happens in a year like 2015, is that the amateur investor rationalizes the end of a surging bull market as “a fluke.” Something that was just “off” this year for some unknown reason or another. So, they dig in and do nothing. This is incredibly dangerous. Their rationalization causes them to overlook how Federal Funds Rate Increases have impacted markets in the past. They overlook very high PE ratios in a Stock Market Stall. They overlook the reasons behind wildly fluctuating commodity and oil prices. They ignore the ripple effect of the economic impact of countries like Greece.
It’s years like 2015 that underscore the value of an investment advisor / financial planner. A competent professional will not rationalize. They will realize where the market cycle is likely headed and know how to help you Hedge Your Bets. A strong financial planner will not stay with an investment simply because they “hope” it will go up in value, or because some celebrity investor is involved. They will sell and move to more secure and greener pastures.
Take last year. The stock market was good until May 26th. After that, it was a pointless volatility nightmare. The broad bond market (not high yield) had some volatility, but still paid interest and dividends as the Federal Funds rate got sorted out. In other words, some of us still made money last year largely because we got out of stocks when the getting out was good, and then stayed out. (See: And We’re Out of Stocks.)
My point is, a competent financial planner is not a gambler. He knows when to fold ’em.Sing it, Kenny Rogers!
While the general research consensus is a 10-12% gain over 2016 and 2017 -COMBINED –it’s a tough sell on which year will be better. Most firms are saying that 2017 will be better, but they’re banking on inflation coming back with a roar. Which seems unlikely. Money will be cheaper in 2016 than 2017 given that the Feds are targeted to raise rates only 1-1.25% in 2016, and probably more in2017. Still, the general consensus is about 4% for 2016, and the rest for 2017.
Blah blah blah.
So let’s see, if I can make 4% in a bond fund that carries about 80% less risk than the S&P500, why on earth would I buy the S&P 500 at its current price? Maybe I’ll wait until it gets its next thumping (drops 10%) and then ease a toe back in to capitalize on the spread. Dunno. Seems like a better idea to me.
But here’s the rub. We’re approaching the end of a macroeconomic bull market cycle. In the past, when the Feds started to raise rates, we had roughly two years of tepid growth followed by a brief plateau and then catastrophe. This is how the market works. Have a look at this chart from my last post, entitled, Why You Care If Today is the Date the Federal Funds Rate Increases. I’ve circled the last two bouts with rising federal funds rates. Notice what happens to inflation and SPY (S&P 500)? Ultimately, nothing good.
Of course, this Federal Reserve bunch insists “things will be different” this time. But, I’m not so sure. And, I’m certainly not willing to bet my clients’ life savings on it.
Frankly, any long term investments in the stock market during this “tightening” phase of the Federal Reserve is simply a game of chicken. Probably more so in 2017 than now. But with such a tiny upside, it’s not worth the downside risk. Anyone remember the 60% losses of the Great Recession?
So, if you’re hoping to make money in the stock market over the next few years, don’t set your sights too high. I’d rather see you with cash in your pocket as the bull market wanes, than experiencing a tarnish in your golden years.