I, along with most other advisors, constantly caution people about trying to ‘time’ the markets. I personally don’t think anyone can do it with any consistency; and, even Warren Buffett says it’s a fools game – I guess he should know.
So the decision to sell, buy or wait based on market conditions, including the current one, is, according to experts, a fool’s game. I agree.
The issue isn’t whether we should be making market-based decisions; but how we make long-term career decisions, realizing that market climates, like the weather, will change. There are some things we do know, however:
- Interest rates are so low there’s only one direction left; it’s just that no one knows when or how fast.
- When interest rates rise, bond values go down. This isn’t an ‘if’; it’s a ‘when’. The first question, of course, will be when the Government will quit continuing to sell debt to finance new spending.
And, there are some other things we should know:
- Many company earnings and balance sheets have been bolstered by cutting costs (payroll) more than by increasing sales during a global recession.
- The government has been printing money, creating inflation, particularly in areas the government doesn’t count in its cost-of-living index (CPI-W, which measures wage inflation – a convenient measure during a recession when they want to reduce outlays to pension and Social Security recipients). This has the tendency to create inflation-fed stock market pricing, just as it creates it in grocery stores and gas pumps.
- When interest rates begin to rise, bond rates will follow suit – depressing bond prices, as stated earlier. When this happens, those holding bond mutual funds will see decreasing values; while those not in bonds or bond funds will begin to see them as a ‘safe haven’ offering a chance to buy higher yields at lower prices. Believe it or not, you CAN lose money in a bond fund; this comes as a surprise to many.
- When U.S. debt becomes less attractive globally, or the government cuts back on printing money to finance our growing debt, bond prices will begin to fall. It’s corresponding higher rates will likely siphon-off money from the stock market.
Some think not. Economist Arthur Laffer, the architect of The Laffer Curve and President Reagan’s ‘supply side’ approach to economics, recently stated in an interview that current corporate earnings actually justify higher prices if only there were less government intervention. While it could be true; it’s also easy to see the source of those profits, as I indicated earlier.
So much for white noise.
What has all this to do with your retirement within the next ten or twenty years? Probably less than zero.
It probably means just as much to you as the Cuban Missile Crisis, the attack on the Marine barracks in Beirut, the gas lines of the late ‘70s, or the bank failures of the early ‘80s meant to the retirees of today.
Economies, like life, move on.
There seems to be little doubt among most experts – a scary thought when too many agree and follow the “this-time-it’s-different” crowd – that the future will probably mean lower yields and returns than the historic averages we’ve grown accustomed to over the past few decades. The demographic trend of an aging population would seem to support this; but, it’s also true that that may be more of a domestic (U.S.) issue, while more companies are doing business globally than ever before. Caterpillar, after all, is selling equipment all over the world, including China, where the demand for roads is expected to grow exponentially over the next decade; and Caterpillar isn’t alone.
What does all this have to do with your retirement within the next ten or twenty years? Maybe something. You should talk to your advisor about what, if anything, that means to you.
- Follow your written business plan, investment plan, financial plan, survival roadmap, monetary guidebook, whatever you want to call it. It’s your ‘lighthouse’ in the storm – the one thing that is stationary when all else around you is in turmoil.
- Avoid fads. The world hasn’t really changed, despite the man-made economic events that have convinced us otherwise. The investment industry events a new theory every time the public has a new worry. Then, they manufacture a product utilizing the theory to address the worry. Many in the investment world believe that many long-accepted theories regarding risk-adjusted asset allocation strategies are now outmoded in ‘the new environment’ and new theories, with new products those theories sell, are the new way to address these new concerns. Unfortunately, many of these new solutions come at a high cost and, in the end, are likely to make little if any difference.
- Think long-term. Don’t react. Better: Turn-off the news. Most of it is really just entertainment anyway. Your long-term success will not be tied to how you reacted to a news story. The next time you hear about a Warren Buffett investment, remember that he had been negotiating a deal you’d never get access to and had been doing it for some time before the news media even learned about it. You and I were the last to know.
It’s about putting time on your side by following a long-term plan – something you and your advisor should be regularly reviewing.
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Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and An Accredited Investment Fiduciary® in his 21st year of private practice as Founding Principal of The Independent Financial Group, a fee-only registered investment advisor with clients located in New York, Florida, and California. He is also licensed for insurance as an independent agent under California license 0C00742. IFG helps specializes in crafting wealth design strategies around life goals by using a proven planning process coupled with a cost-conscious objective and non-conflicted risk management philosophy.
The Independent Financial Group does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.