Choices ahead amid stock
market highs
The stock market has recently reached all-time highs. Now what?
The question to ask is not how high the market will go but rather: What do I do with my portfolio now given my own personal circumstances?
No one can tell you for sure how much higher the market will go or what could trigger a sharp decline. There are good arguments on both sides.
The bullish argument says that money moves markets. And there is plenty of money sloshing around the world, looking for safety and a good return. Safety is a big issue, especially in Europe, where Italian banks are struggling and prospects for the Euro look dim.
The search for higher yields is global. With Germany selling its 10-year government bonds at a negative yield, you can see why there's demand for the U.S. dollar and for U.S. stocks.
The bearish argument says there is just no good reason for stock prices to be this high. Business isn't growing that strongly, productivity is falling, wages are moving up only slightly and earnings aren't booming. But the market is ignoring that argument so far.
Of course, markets always move to extremes based on investor sentiment of fear and greed. The CNN Fear and Greed index is now at 86 — its highest level since spring 2014. And the VIX, a measure of volatility that is typically aligned with fear, is now at the lowest level in two years — a sign of complacency.
So you have two choices now: Close your eyes and hope the market goes higher or do a little portfolio planning of your own. It's far better to reallocate your profits when the market is making new highs. Here are five things to remember:
There has never been a 20-year period when you would have lost money in a diversified portfolio of large company American stocks with dividends reinvested, even adjusted for inflation. That's a Morningstar historical fact. That “portfolio” is the S&P 500 fund, which is likely in your 401(k) plan. Do you have a 20 year time horizon for at least a portion of your money? Then time and history are on your side.
There is likely a more conservative stock market choice in your 401(k) — an “equity-income” fund, or a “balanced fund,” which holds a mix of dividend-paying stocks and short-term bonds. This fund will also decline in a market crash, but less than a pure stock fund because of the income cushion.
Today's investors have never seen the damage a spike in interest rates can cause. When rates rise, bond prices fall. For example, if interest rates were to rise 3 percent, the price of a 10-year U.S. Treasury bond would fall 25 percent. Bonds have risks, too.
“Chicken money” sits on the sidelines in money market funds, short-term bank CDs, and Treasury bills earning next to nothing. That's the price of peace of mind. Most 401(k) plans don't offer this conservative choice, so you might need to hold your chicken money outside your retirement plan to balance the long-term growth in stock funds.
Don't procrastinate in rearranging your portfolio. There's an old Wall Street saying: “No one rings a bell at the top.”
There always have been and there always will be market “crashes.” Next time around, let the uninformed be the ones to panic, while you stay appropriately allocated for your own future and sleep well at night. That's the sign of a successful investor. And that's The Savage Truth.
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