Recently a client asked about a NY Times article about the near-term future of the stock market.
I am very confident that a long-term strategy is essential for investing in the stock and bond markets.
Lately (December 2016 - January 2017), markets have gone up and that feels good but since March 9, 2009 we have had several market drops (2010, 2011, 2012, 2013...then 2015 and 2016).
Some market downturns were -8%, some -11% and last February 2016 -14%.
That was interesting and disturbing yet the markets did rebound so the long-term strategy is a reasonable approach.
Someday we will have another more serious market drop (20-30% or more), but we learned from the 1971, 1973, 1984-5, 1991, 2001-2, 2007-9 major market downturns that the recovery occurs for those who wait - it could be 4 years or more. There never is a guarantee though.
The key: if you need cash from your investments within 5 years, then that portion should not be invested in stock funds.
The other key is to have enough "years of safety" to not worry about market pundits and commentaries.
For every nay-sayer I can find an opposing viewpoint. My advice: ignore it.
Markets many times do go down about 6 months (a leading indicator) before a recession but no recession is expected by economists in the next year (2017) or two (2018). We will see.
Specifically, about this article, the author wrote:
"...“The big picture for investors is this: Trump is high volatility, and investors generally abhor volatility and shun uncertainty,” he wrote. “Not only is Trump shockingly unpredictable, he’s apparently deliberately so..."
And he said: "...it is simply unthinkable that Donald Trump could become our president..."
Well, he got that prediction wrong so why believe any others of his?
For those Christians among us, our trusted Bible says that if a prophet has one false prediction then do not listen to him. Forecasting the future is inherently difficult.
Of-course the NY Times and the Washington Post are no friends of President Trump.
So another point is always consider the source of the article.
Wait a minute, this article then goes on to say:
"...From the letter, it is hard to divine exactly how Mr. Klarman is investing his fund’s money..."
And...
"...Mr. Buffett campaigned publicly against Mr. Trump, but he has nevertheless invested in the market since his election..."
Yes, indeed, the truth of the matter is that some of these well-known investors may hold 30% in cash but the rest of the money is invested.
It has to be. Earning 1 or 2% on your money is likely not going to meet all of your goals.
On ETFs and INDEX investments which also were mentioned in the article:
It is absolutely true that holding an indexed ETF means that as certain companies become over-valued we own them. We are owning the market as currently valued.
That is the point, own the market rather than try to beat it which is, for many, a loser's game.
It is also true that value companies (rather than growth companies) and small companies may have a long-term edge, though in reality, the gap in expected returns appears to often narrow over time.
Yes they move up and down at different rates at different times, but not always.
That is why ETFs are separated into these value, growth, large, small, US and international categories as well as bonds and cash within a portfolio.
Diversification is no guarantee and a market downward trajectory will affect anyone invested in the markets short-term.
There are other investments that stray from "market- cap" (where the size of companies are in proportion within the funds) but all that really is to many advisor's thinking is market timing of some sort or another.
The strategy I subscribe to is to mix small company funds and value company funds in the portfolio to make those kind of adjustments. So, the lesson:
1) maintain a balanced portfolio
2) keep enough years of safety in cash to meet needs (there are other strategies to research too)
3) ignore the market swings and ride out the inevitable downsides (they do occur and will again)
4) read articles and listen to pundits and prognosticators with much skepticism