Stock Market Trend Changes Can Rip Your Face Off

When stock market trends change, they happen in a hurry leaving mom and pop investors feeling like the town of Havasu would if the Hoover Dam broke.

It was February of 2007 and John and Erica were sitting pretty for retirement.  Their house was paid off and their liquid investments were valued near $1,000,000.  The fall of 2008 was just around the corner and it was going to be their last year running the cross country ski apparel line RaceDingo.

Lowe’s stock represented $550,000 of their wealth, after all it was a smart investment and a safe investment. The Motley Fool regarded it as a no brainer to have in your portfolio, (See Woes Slow at Lowe’s) so what could go wrong?

A lot… take a look at the chart below.

Lowe's shareholders felt pain in 2008/2009.
Lowe’s shareholders felt pain in 2008/2009.

It’s a sad but familiar story.  In less than a year LOW was trading near the $13/share range and John and Erica had an unpleasant change to their retirement plans.  

Thank goodness John and Erica listened to their advisor and didn’t have all of their eggs in one basket.  They diversified across the following mutual funds:

  • Fidelity Freedom Fund 2020- FFFDX
  • Hartford Capital Appreciation Fund- ITHAX
  • Vanguard Balanced Index Inv- VBINX
  • Vanguard 500 Index- VFINX
  • Cavanal Hill Intermediate Fund AAIBX

Let’s look at how these funds performed during the same time period.

Fidelity Freedom Fund Took a Pounding in 2008 and part of 2009.
Fidelity Freedom Fund Took a Pounding in 2008 and part of 2009.
Hartford Capital Appreciation Fund Did not perform well in 2008 or the first part of 2009.
Hartford Capital Appreciation Fund Did not perform well in 2008 or the first part of 2009.

 

Vanguard Balanced Index Performance in 2008.
Vanguard Balanced Index Performance in 2008.

 

Vanguard 500 Index 2008 Performance
Vanguard 500 Index 2008 Performance
Cavanal Hill Intermediate Bond
Intermediate Bond Fund with low reward potential was socked in 2008!

Wait, John and Erica were diversified across mutual funds that hold both stocks and bonds, isn’t diversification supposed to smooth out their ride?

If diversification can’t smooth the ride, what can investors count on as a safe investments or smart investments knowing that stocks and bonds COULD fall very fast at the same time?  

What is truly sound investment or stock advice for investors and retirees?

I’m not a doomsday investor and I’m not writing about this because “I’m sweet and always want to be different” like my pal Seth always tells me.

I’m talking about these issues because I’m realistic, I’m aware of market risk, and I know how quick stock market trends change.

I want you to know there are other ways to plan for your future.

You don’t have to invest dramatically different from what you do now, you can even keep your diversification strategy if you wish…just add another piece to the pie to make your investments more tolerable when stock market trends change!

Last week Switzerland removed its exchange rate floor against the Euro (CHF/EUR) and the market activity that ensued was was shocking, powerful, and hopefully eye opening for investors across the world.

The decision by the swiss bank left well known Futures Commissions Merchant FXCM, the Everest Macro Hedge Fund and many other hedge funds ready to close their doors.

January 16th 2015 Kristen Scholer from the Wall Street Journal reported:  “Shares of FXCM were down more than 80% in pre-market trading after the firm, a platform for retail foreign-exchange traders, said late Thursday that clients experienced significant losses as a result of the sudden moves in the Swiss franc.”

Below is a picture and a link to the Wall Street Journal Article:

FXCM was nearly out of business overnight.
FXCM was nearly out of business overnight.

American markets and individual securities halt trading when certain stocks or markets get rocky (SEC Trading Halt Rules) but there is not a guarantee instruments will recover once trading resumes.

You’re probably reading this saying “ my investment strategy is not that risky, I don’t trade the currency markets I stick to safer stock, bond, and mutual fund holdings, or I don’t invest in stocks.”

It’s not safe to assume your investment is a smart Investment, a safe Investment or a conservative Investment.

Check out FINRA’s warning about your bonds.  Explore the risks in bond and balanced mutual funds.  Perform a stress test on your safe investment.  If you think your broker did this-guess again, my bet is that your brokers didn’t or they might now even know how to measure those risks (scary to take stock advice from a broker who you thought was an expert but was really just a salesperson)! 

The S&P 500, Lowe’s stock (LOW), balanced mutual funds, etf’s and bond holdings are not excused from big losses like the CHF/EUR. Today your LOW Lowes stock is trading at nearly $70/share. Your Fidelity Freedom Fund 2020 and nearly every other mutual fund and stock index are sitting at or near all time record levels.

Don’t be surprised, shocked, or angry at wall street if your investments trade at half their value soon.  It happened 5 short years ago and there’s more than a handful of major issues in the U.S. and across the globe that could turn your safe investment, Lowe’s Retirement, or whatever you want to call your portfolio into a dog (but not a cute dog like Griffin).

Adorable Dog
Adorable Dog


The chaos from the removal of Switzerland’s peg to the Euro could be one of many more changes that could send your investments to a place you don’t want them to go.  Stocks, bonds, and mutual funds on their own are all susceptible to unfavorable changes at any given time, so:

  • What’s your investment strategy?
  • What Investment Advice is your advisor giving you?
  • Do you have insurance on your investments?
  • Do your investments match your objectives?

Ask a few more questions, interview a few more advisors, and think outside the box.

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This presentation is for informational purposes only and is not INVESTMENT ADVICE, TAX ADVICE, 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.