Stock Market Roars Up – Use Logic Rather Than Emotion

hope is not a strategyThe U.S. stock market just had a terrific first quarter.  The S&P 500 index was up 10.0% over the past three months. My client portfolios were not up that much because they also own many other investment asset classes that didn’t advance nearly as much.  For example, the bond market was flat for the quarter, therefore a 50/50 split between stocks and bonds may have seen a 5% increase in value the past 90 days.

What will happen the rest of the year is a complete crap shoot.  The chance of the market going higher or lower is unpredictable with any certainty, yet many individual investors are jumping on the stock bandwagon (emotion) as they want more of these high returns.   If anything, logic would tell us that stock prices, being significantly higher than they were, are more likely to be over valued now than they were 3 months ago and certainly two years ago when many were priced much lower.

The basic investment principal of “buy low, sell high” only seems to work from a distance rather than in how people actually manage their personal money.  How many people reading this are pulling money from their stock and bond funds (selling high)?  Why is it that when the stock market is down 10% (on sale), people are scared that the market will go lower and often pull money (sell low), but the idea that prices might fall soon seldom crosses a person’s mind when prices are up?  Bond prices have been generally going up for the past 30 years and will have peaked unless interest rates move lower (which would be hard to do).  Despite this, many people are still putting money in long-term bonds, desperately seeking a higher yield, ignoring or being ignorant of the principal risk they are taking.

From April 4, WSJ  – “While investors had shunned equity mutual funds for years in the wake of the 2008 financial crisis, stock funds have recorded record inflows for several weeks in a row.”  Once again, investors did not buy low in 2008, but are excited to buy when stock prices have doubled.

My philosophy has never been to time the market and I try to do everything I can to take “emotion” out of the investment decisions I make for myself and my clients. This is done by matching our client’s investment money to their ultimate goals and directing it in such a way that they will not “panic out” when the next major decline occurs in any asset class.

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Over the past four years, our economy has been horrible and with very little reason for economic hope it would have been easy to crawl in a hole and move money to a “cash” position until some pro-economic reform saw the light of day.  This market timing strategy would have cost client’s a bundle by missing a HUGE stock market recovery.  Now that the stock market has roared back, I am no more confident in the economy than I was four years ago (the $17 trillion in National Debt and Obamacare will create GIANT financial problems for people, businesses, state and federal governments).

I do not know which way the market will move next, but I feel confident that the allocation of my client’s funds matches their specific goals so that they can have financial “peace of mind” .

Q.  Should your retirement portfolio (IRA/401k) allocation be tweaked?

A. Yes, if you are not confident how your portfolio will hold up when the stock market has its next normal 10-20% correction. How will your bonds do when interest rates finally rise and bond prices get hammered?

As our Nation’s Debt and government spending continue to spiral out of control, the risk is growing in certain investments. Long-term (government, municipal, & corporate) bonds have never been this risky.  If interest rates go up these bonds could lose significant principal.  The value of the dollar could also be subject to great loss as rapid inflation could be on the horizon one day.  Consider adding commodities and other assets that are not highly correlated to U.S. Stocks and bonds to a diversified portfolio as potential hedge investments.

As you can probably tell by reading this, my investment focus is more about playing defense rather than offense when it comes to investment portfolio construction.  One big reason for this is to manage client emotions and do what I can so they don’t do the absolute worst thing they can do and “sell low” during the next correction or bear market.

The tortoise often beats the hare when emotions get in the way of the hare.

If you would like a second opinion about how your IRA or 401k is invested, you can contact me for a free volatility analysis.

 

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