Long term investing

Stock markets at all time highs!

This week we’ve seen US stock markets climb to new records, despite trade wars, political chaos, and overvaluation. The data says we’re at high risk, and the stock markets keep going up! The tactic of selling out and going to cash has been a miserable failure in the past. What has worked best has been the choice to simply keep our portfolios very diversified, allocate conservatively, and be patient.

https://www.marketwatch.com/story/dow-set-for-best-week-since-july-as-stock-futures-imply-deeper-push-into-record-territory-2018-09-21?siteid=bigcharts&dist=bigcharts. 

It turns out that healthy, positive lifestyles, good emotional skills, and education add to affluence too!

This study also dealt with affluence. So when we discuss plans for multi-generational wealth, we are inevitably also drawn to healthy lifestyles, good emotional skills, education, and robust, positive parenting. All these appear to affect health, longevity, and even affluence. https://www.businessinsider.com/things-that-make-people-live-longer-happier-lives-2018-8

Famed Economist Robert Shiller Sees Upside In Overvalued, High Risk Market. What’s An Investment Advisor To Do?

Happy Friday! As the world is being battered by two great storms (Hurricane Florence in the Carolinas and Super Typhoon Mangkhut in South Asia), our own U.S. stock market is overvalued, high risk, and climbing ever higher! But Nobel laureate economist Robert Shiller, who has successfully predicted past market debacles, feels that the stock market could still go a lot higher! So we are maintaining a highly diversified, somewhat conservative allocation, but we are NOT “cashing out” of stock market mutual funds. Reality: nobody knows what will really happen. https://www.bloomberg.com/news/articles/2018-09-14/shiller-says-u-s-stocks-could-go-a-lot-higher-before-dropping

Stock Market Storm Ahead? Goldman Sach’s Indicator Is Blinking Red

Goldman Sachs has released a report which warns of a potential stock market decline ahead. We don’t really know what will happen. Nevertheless I feel that it’s prudent to stay diversified and allocated to a relatively conservative spectrum of mutual funds. As the new Goldman Sachs report notes, “many investors are wondering how long the economic cycle and bull market can last, and what type of conditions could follow. The difficulty in answering these questions is that the current cycle has been difficult to pin down. It has been, and remains, a very unusual cycle, making historical comparisons less reliable.” https://www.zerohedge.com/news/2018-09-05/goldmans-bear-market-indicator-shows-crash-dead-ahead-asks-should-we-be-worried

What Putin means for our investments.

Consider Putin’s efforts to rebuild the Russian empire from the standpoint of organized crime seeking to optimize itself financially. The amount of disinformation, hate-baiting, distraction, and violence is astonishing, but all that covers up an even more awsome level of mindful corruption. I believe that Putin intends to literally corrupt the entire western financial system for financial gain and political control. Is the Putin organization willing to destroy the financial underpinnings of the west? Probably only if it stands to gain financially. Thus our plan to keep investments simple and diversified seems appropriate. https://euobserver.com/justice/142726

Something’s happening here. What it is..

My last entry on January 30th, 2018, suggested that US stock markets were potentially overvalued. Apparently others agreed with that assessment, because early in February, in the face of rising interest rates, American stock markets dropped (almost) 10%. At that point I was guessing…a perfect word for it…that the financial markets would continue to decline to more reasonable levels. However, I chose to do no trading because I wasn’t confident.

Good choice. This week, U.S. stock markets strongly reversed, producing one of the best weeks in years. I suppose that had I been courageous we could have bought the dip, but I was too conservative for that.

Meanwhile international markets fell more, and have recovered less.

With the prospect of rising interest rates in mind, I perceive that the possibility of a downturn more wrenching than what we have experienced is still quite possible. Where we were before somewhat vulnerable, we are now substantially more vulnerable. My guess is that this week’s recovery is driven by FOMO, Fear Of Missing Out, not from any rational expectation.

Meanwhile I’m watching the bond market, and interest rates finally seem to be stirring, moving up. That’s a real, genuine game changer, potentially negatively, for many reasons.

Bottom line: for the time being, I’m maintaining our current asset allocations. But I’m targeting potential bargains, and I’m watching the horizon. Something profound may be happening. Frankly probably not, because most warnings don’t actually materialize into anything real. But what if…? Read more here.

Focus on the long term

I was reminded of that today when a client called up and asked what return he could expect on his investments. I said we really can’t predict, but a long term average of 7% has historically been both attractive and doable, with discipline. We really can’t say what the future will bring.

What does “discipline” mean? To some degree it means that we ignore the day to day noise and focus on long term realities.

Reality: Bitcoin is probably a bubble. Thus we should approach cautiously if at all.

Reality: The economy is profoundly leveraged, “in debt up to our eyeballs”. That always has negative consequences.

Reality: The financial markets are probably overvalued. A downturn in the future is probably inevitable. The downturn will probably be followed by an upturn, as day follows night.

Reality: history tells us that we really can’t guess. In the decade or longer time horizon, by buying low and avoiding bubbles, we will probably steer our investments towards attractive gains. In other words, in the long run, most of the above doesn’t matter. Stay the course. Stay diversified.  Patience pays.

Read more.

Thirty years ago

Thirty years ago this week I was beginning what was then a very novel business model: fee-only, no commissions. I was working at Christopher Weil, Inc, after a few years at E.F. Hutton. The consensus among the veterans was that fee-only could never work. Now it’s the industry standard, and I was present at the beginning.

Much to the chagrin of some of my managers, I had moved my clients’ accounts to safer positions because I thought the stock market was overvalued. As the Quotron…a primitive computer…kept posting lower and lower numbers, I looked over at the office manager. His face registered horror. We turned on a speaker from the floor of the New York Stock Exchange, where the trading was done with paper and voice, and we could hear a roar from the crowd. Everyone was trying to sell.

After that, I bought stock mutual funds for my clients and for myself at bargain prices. The market fully recovered within months. Our portfolios benefitted much more than any losses hurt us. Black Monday 1987 was the first time that awareness of overvaluation produced a big win for us.

Since then, calling out overvaluation has been much harder. In the 1990’s we were right but it took YEARS before the 2000 Tech wreck, and many clients became discouraged before it happened. The 2007/2008/2009 Financial Panic was different because recovery took a long, long time. Many clients were discouraged by that as well.

Now the financial markets are overvalued again, but the central banks have changed the game by stimulating. We don’t really know what will happen. Eventually I expect that a correction must occur, but it may or may not replicate the sheer terror of Black Monday 1987. Meanwhile, all we can do is pay attention and stay diversified. As my life illustrates, patience pays.

 

Gone and mostly forgotten.

Ten years ago today, the S&P 500 U.S. stock market index hit its record high before falling about 57% in the Financial Panic of 2008. It recovered in March, 2013.

Before the meltdown, there were already major issues in the financial system which were larger and more dramatic than what we are facing today. So is such a meltdown imminent now? If so, I can’t see it. But valuations and debt levels are again high.

How soon we forget. Read more here. 

60% of a bag full of slow

The stock markets of the world appear to be impervious to every current geopolitical event, including the threat of nuclear terrorism and serial hurricanes, while a growing number of writers are shrieking that the end of the financial world is nigh. (Read the latest apocalyptic broadcast here.) Hmmm. I have my doubts, but there’s a lot of smoke in the air. Conditions being what they are, last week I moved 5% in many clients’ accounts from stocks to short term bonds. That’s very unusual for me. I’ve learned the hard way that even the best-calculated predictive indicators are easily undone by Fed easing. So usually nowadays we simply stay invested. The long-term force is with equities.

However, bonds aren’t deeply attractive right now either, except as a place of relative safety. Some bonds, especially longer-term issues, are overvalued like stocks. And the perception that the Fed Will Make All Things Good is strongly at work in bond-world as well. Here’s an interesting article which details the almost nonexistent difference in three year performance between top-end bond funds. Some of our conservative clients have portfolios which are 60% bonds. Those bonds aren’t producing much. Granted, bonds are traditionally holistically safer than equities, but in terms of gains, they historically don’t do much.

Right now, because of valuations, we temporarily have clients with 60% invested in boring. My hope is to eventually get them into equity bargains, and make some real long term gains. Patience pays.