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How the Market Works

Get the Whole Story on Risk & Reward – How the Market Works

Posted by kdadmin on December 1st, 2016.

Get the Whole Story on Risk & Reward – How the Market Works

In this age of fake news, the shortsightedness common to much of financial media continues to lead you astray. Headlines like “record stock market high,” or “oil is hitting new highs” or “the great rotation from credit to equities has begun” don’t tell you the whole story. Worse, they speak nothing of the current, significant risks present in our domestic stock market.The truth is …

Get the Whole Story

You’re not getting the whole story.
Since election night, the stock market is up just over3%, and bond market is down by 2%. And though all the headlines are about how “oil is hitting new highs and the stock market is at all time highs,” that’s not anywhere near the whole story. Oil is still down more than 50% from his highs 18 months ago, and the stock market is barely eeking out returns. The headlines are sensationalized crap designed to sell papers, addict you to news channels, and get you to make the foolish mistake of buying in at the top of the market.

Just look at the chart above.

In 18 months, since we dumped the majority of our equity stake, the stock market has risen by a mere 4.59%, and the bond market has fallen by 1.64%, excluding dividends. Add those back in an you’d see another 3% in stocks and 4.5% in bonds.

But, more importantly, if were planning to use your investment money to fund your secure retirement, part time retirement, or sabbatical leave in the next few years, which investment line gives you the best sense of security? Especially knowing that we are currently at a stock market high with all signs pointing to a crumbling plateau? Oh, and that the primary and secondary government stimulus has been, and is being, actively removed?

Risk &Reward

Check out the blue line. That’s SPY, the S&P 500 index tracking ETF fund. If you had a million dollar portfolio, and you’d put your money in that for the last 18 months, how would you have felt about the risk and reward trade off? Let’s put this into more graphic terms. How would you have enjoyed repeatedly losing over $120,000 just to end up with a $45,000 gain at the end? Not to mention that the S&P 500 has spent nearly75% of the last 18 months, under water. Not really a “growth” market anymore, is it?

Now look at the red line. That’s AGG, the corporate bond index tracking ETF fund. Under the same scenario, how would you have felt about that experience? Bounding between a $15,000 loss and a $35,000 gain? WHILE the stock market was going through purported “end of days” scenarios in the media? I’m thinking you’d feel better. How about if you also knew that this portfolio was paying roughly 4.5% in dividends?

Lastly, look at the orange line. That’s a money market fund. It did nothing over the term. A flat line. Money market funds can be a great tool for total catastrophe, but can’t really produce any long term growth or income. They do, however, serve as a great “baseline.”

How the Market Works

Right now is the most dangerous time of the market cycle. It’s a time of market instability, of macroeconomic forces that indicate the plateau right before a contraction, it’s a time of foolhardy rhetoric, of political division, of flat employment, interest rates, inflation, consumer and manufacturing demand, and mediocre GDP growth. This is NOT a time to go whole hog into stocks. It’s also not the time to lament not buying all of the market dips.

The market cycle is not an opinion, it is a fact. Anyone telling you that we’re at the beginning of some new bull market epoch is either stupid, uneducated, or trying to sellyou something that pays a hefty commission.

The time to “buy the dips”in the stock and long term bond markets was in the first half of the year. Which we did, and we made a tidy profit for our clients. But we stopped playing chicken in June of this year when things started to get screwy with currency valuations, the UK’s decision to leave the EU, and the election.

Nobody Likes to Lose Money

One of the biggest misnomers in the investment world is that younger people with higher paying jobs can, and should, take bigger risks than the average retired or semi-retired individual because they have more time to make up the losses. To some extent this is true, but not in every market.

But riddle me this, do YOU like to lose money? Even if you can? Even if it doesn’t affect your long term financial health? Do you like to take stupid risks just to eek out a little bit of potential profit?

I don’t. And I’m younger and have a higher paying job. But my money is in bonds.

I would MUCH rather give away a bit of potential upside at the top of market to know that if/when the stock market tanks, I don’t lose big. Further, I want to have ready cash at the bottom of the market so I can make my heavy bets then.

Patience is a Virtue

Now the statement, “Patience is a Virtue,” coming from a driven, often impatient, action oriented person like me has probably made those who’ve met me burst out laughing or snort their drink.

But, in this stock market, it’s true.

As is the equally annoying statement, “Good Things Come to Those Who Wait.”

The current stock market state does NOT, and has NOT, represented a great investment opportunity for quite some time. The bond market, on the other hand, is starting to get interesting …

The Next Steps?

Do nothing with stocks. Sit on your hands if you have to.

In fact, take this opportunity to make a real improvement in your financial life by getting your cash flow in order. Like I mentioned in my article, The Election: How Will It Affect Your Portfolio and Financial Freedom,follow my guide below and take a step towards getting your Financial Budget in order.

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