Record Breaking Movement
I’m sure most of you saw the news in the last 48 hours and are wondering if the world is going to implode or not. I suggest the world will not in fact implode, but if things do not change, life will be very different. The words that I’m about to offer you won’t do the market action justice, but I’ll do my best to share our take on the latest market commotion.
On Sunday night, my tablet was armed and ready for the open. I thought we would see movement, but I didn’t imagine the S&P 500 would shed 50 points before midnight and be in a stock market correction within 48 hours. This pre market activity didn’t seem real as the Dow dropped over 1,000 points before most people had their first cup of coffee Monday morning! When the closing bell sounded, investors reflected on the day; we witnessed history as the Dow moved over 4,000 points in a trading session and broke an intraday record for movement! The S&P 500 last saw an intra-day drop this big in 2011.
The recent market pressure leaves the equity markets in official “correction” territory. Investopedia defines a correction as a reverse movement, usually negative, of at least 10% in a stock, bond, commodity, or index. The definition of correction on its own does not scare me, what scares me is that China just lowered rates, injected cash into their markets and the U.S. market just closed down 25 on the day… after showing S&P 500 gains of over 40 pts-all in one day!
Risk management is next. We all want to be the hero and predict the market’s next move. In reality, nobody has a crystal ball. As always, I highly encourage you to use proven risk management techniques under these unfavorable market conditions. Make sure you know your risk tolerance. How will you react when your account value shows $400,000 instead of $1,000,000? Was a drawdown of $600,000 part of your expectation?
Ask your advisor how he/she manages risk. Ask them how much you will lose if the market drops another 10% or 20%. Ask them what their strategy is if the market spirals into another 2008. Do they have cash on hand to buy lower? Will they have the guts to buy if markets are imploding?
Plan for the worst and hope for the best.
Do you want the state to decide who the guardians of your minor children will be if you and your child’s other parent pass away? Do you want the state to decide which of your relatives inherit your assets?
If you answered no to the questions above then the answer to the question “Do I need a Will” is yes!
A properly drafted and executed will puts the power of deciding how your assets will be distributed and who will be the guardian(s) for your minor children if/when you pass on. It’s relatively easy to make and execute a will, but according to RocketLawyer.com almost ⅔ of Americans do not have one!
Ok, so now you know that if you have assets or minor children (or both) you probably want to learn more about Wills. [Read more…]
Should I Invest in Stocks?
Do you feel like you missed your chance to participate in one of the largest bull markets in history and have the urge to invest stocks? Be careful because greed can be a powerful emotion….
Consider these three MAJOR reasons you might want to play defense with your retirement savings and investments.
1.) The Federal Reserve Just Stopped the Money Train
On October 29th 2014 Janet Yellen announced the end of the Federal Reserve’s quantitative easing (QE) program. For those of you who don’t know- this means the Fed will stop purchasing bonds in the open market.
Awesome, but what does this mean to me? There’s no law or rule, but when the Federal Reserve stopped QE 1 and QE 2 the equity markets took it in the chin and left many investors confused like Iron Mike was after Buster Douglas delivered a barrage of punches KnockOut that ended his reign as champion.
Since QE is now in the books (at least temporarily) my clients and my personal investment allocations will strongly consider how markets performed when the previous QE programs ended before we invest in stocks.
2.) Rising Interest Rates will Stymie Corporate Profits
Will interest rates rise? Look at the chart below of the 10 year note dating back beyond the 1970’s and even a novice investor can see where the long term trend will go.
Ok. Interest rates will rise…who cares?
Corporations for one. When corporations are making money employees- especially executive’s bank accounts are padded. When employees are making more money like all of us, they get a bit excited, spend more money and then the businesses who they buy from are happy.
One of the factors that can make or break those corporate profits is the cost of debt. The cost of debt is related to 10-year treasury.
Again, look at the 10 year treasury chart above (thanks yahoo finance) and give your best guess about where you think interest rates are headed. You guessed it, interest rates WILL rise…. it’s a question of WHEN not IF they will rise.
Since bond values drop when interest rates rise, and there is a high chance that interest rates will rise, is it really a safe investment strategy to hold bonds? (Learn More About Bonds).
Now let’s pretend you are a company and you forecast the cost of a large project scheduled to begin 4 years from now. Will you base the finance costs of that project on today’s rates? Really? If you said yes -what happens if the cost to finance that same project doubles? Oh $it!
If rates rise soon, the cost for that project or the cost to refinance any existing debt will increase. This will have a negative impact on those corporate profits and produce a negative impact across the country.
Note- A large amount of debt re-financing will take place from 2016-2019.
Rising interest rates is a risk to equity markets and is the 2nd reason to consider playing defense with your investments.
3.) The Equity Markets are up over 200% since March of 2009
Do you really have a smart investment? Should I sell my stocks? In addition to the two reasons above, it should be noted that the equity markets are up over 200% since their March of 2009 bottoms.
200% in 5 years! 200% in 5 years! Should I say it again or are you thinking what I’m thinking?
Is it a smart investment strategy to hold stocks and bonds with both markets lurking near record levels? Are the market’s really representative of what’s going on here in the United States and across the globe? Should I invest in stocks at these levels? There’s no right answer unless you’ve discovered the hindsight trading strategy that nails it evertime…but let’s look at the chart and see if we can at least decide if we should play offense or defense in our stocks.
Is this sustainable? Of course nobody can answer that question with a sure answer but if:
- You are a young investor who believes in probabilities and long term technical trading or
- You are a retiree
- You are 10 years from Retirement
- You want a smart investment
- You want a safe investment
Do you really need to know much more?
What investment strategy says to stay in something that is up 200% since March of 2009 supported not by innovation and strong economics but rather by the printing of money?
At the very least play defense with your long equity positions! Here’s a simple question: What would feel worse, losing 50% of your current portfolio value or missing out on the next 50% increase? Think about it. Would it feel worse to still have 1 million instead of 1.5 million or would it feel worse to have 500k instead of 1 million?
Ok, I’ve listed three MAJOR reasons you might want to play defense with your retirement savings and investments. Do you want to make the same mistake as the tech bubble and recent financial crisis? If so disregard this post.
If you want to learn a different way to protect against market disruptions subscribe to our blog/youtube channel or stay tuned next week to find out three ‘formations’ that will be a strong defense!
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This presentation is for informational purposes only and is not INVESTMENT, TAX, or LEGAL ADVICE. THE INFORMATION IN THIS ARTICLE MAY OR MAY NOT APPLY TO YOUR SPECIFIC SITUATION. CONSULT WITH A FINANCIAL, LEGAL, OR TAX TEAM ABOUT YOUR SPECIFIC SITUATION.