We have been fielding some calls from clients (and prospective clients) about the current market and market highs. So the question is this; with the market so high what should we be doing?
Although the last 16 months have been enjoyable watching this upward trend, should we be skeptical of where we are in the market cycle? Will it continue to go up or will it drop? I will try to answer some of these questions for you the best I can.
Will the market continue to climb? No one can answer this question – not even the psychics or the so called “experts” on CNBC. Yes, we have had an unprecedented run of 7 years without a drop of 20% or more although we did hit that 20% drop if you count intraday versus market close back in February 2016. With that said, it is possible for this market to run more. The economy, at this point, is in good shape and inflation is low, albeit the Fed has recently raised rates in a countermove to help keep inflation down. There are always risks including geo-political, interest rate, earnings, market cycle, and of course the black swan event that no one sees coming. This market reminds me a lot of 1996, when a lot of people felt the market was too high (as it was up 34% in 1995 and 20% in 1996). The S&P 500 returns in the 3 years to follow were 31%, 28%, and 20%.
As most of you know, our philosophy at New England Capital is not to be market timers. If you do that, you need to be right twice; when to get out of the market and when to get back in. If the market drops 10%, do you get back in or wait until it drops 20%. What if the market drops a quick 10% then shoots up 20%. Do you get back in then? There is no substitute for long term investing and staying the course. It is not always the trendy thing to do, but for the clients that have been with us for 20 plus years, you understand that not being “trendy” and staying the course has brought you long term financial success.
At this point in the current market, we are seeing a lot of skepticism and people waiting for the drop. In my 23 years of experience in this business, when I see that happening, the market usually does not drop – at least right away anyway. I’m not saying that it won’t drop soon, but in my experience that usually does not happen unless there is greed and euphoria which doesn’t seem to be present right now, just a lot of skepticism.
I’m a current investor, what do I do? As long as your portfolio is allocated properly, you stay the course. If you pull out now where are you going to go? Money Market rates are still at historic lows and will not keep pace with inflation. At least if you are in a balanced portfolio, you can collect yield (dividends and interest) while you wait for the market.
What if I have more cash to invest, do I do it now? It all depends if you are a long term investor, which if you are reading this article, YOU ARE! We plan for 30+ year retirement for our clients. That is not a short term goal, it is long term. If you were to invest now and look back 30 years from now, this moment in time will be insignificant. Now, I’m not saying that you should put all of your money into the market now (if you are not invested already) as short term market performance is random. You can add a good chunk now, and allocate the rest over a 6-12 month period. That way, if the market continues to go up, you participate. If it goes down, you still have more capital to add at the market drop and take advantage of the drop.
If you have concerns about the market or how your accounts are positioned (or what your returns have been) please feel free to call our office. That’s what we are here for AND we want you to understand what we are doing. Knowledge can help dispel fear. Remember that CNBC needs to pay their bills and make money, so using fear can keep you tuned in longer. My advice to you? Turn that financial pornography off!
For some of you that have been reading our newsletters for a while, you know that I look to use historical data quite a bit. Why? Past performance is not indicative of future results BUT I do believe that history does tend to repeat itself. After all, wouldn’t you agree that both Ronald Regan and Donald Trump were both actors?
Market corrections (drops) are a relatively routine occurrence. Despite a market correction of 10% occurring about once a year over the past four decades, the S&P 500 recorded a positive return 75% of the time.
Source: Rimes. S&P 500 annual returns, as represented in the bar chart, do not include dividends. Intrayear drops refer to the largest decline in each calendar year. Total number of positive years and average intrayear drops are for the 40 years ended 12/31/15. Average frequency of declines assumes 50% recovery of lost value. Investors cannot invest directly in an index. Price return for 2011 was 0.0%
While there have been significant setbacks in each of the last 40 calendar years, the S&P 500 recorded a positive return in 30 of those years. What this graph shows is that 3 out every 4 years (on average) the market is positive. No one knows which one will be down. With that being said, keep your eye on your long term goals and shut of the short term noise (aka CNBC) and don’t look at your account values, but understand the legacy and income stream that they can provide if positioned properly. In the meantime, sit back enjoy the ride and enjoy what’s important – LIFE!