The Forces Behind Income Inequality in America

My Comments: Followers of my posts have heard me say that income inequality is the greatest existential threat to our society. It ranks up there with global warming.

The path we appear to be on right now, both here in the States and across the planet, will not change until this issue is addressed. It will lead to the same destructive ethos that caused communism to fail; without an economic incentive to push toward a better future, productivity disappears.

An example of this appears in the middle east today. With little chance of economic gains, young people, deprived of the chance to grow a family, live ‘normally’ with a promise of future prosperity, turn instead to religion and jihad. For many, they have nothing to lose so they embrace the myth that salvation is on the other side.

By Charles Bovaird | September 10, 2016

Several factors have come together to fuel income inequality in the United States. While many market observers have examined this rising inequality, the McKinsey Global Institute took a different approach, taking a closer look at people whose income either stayed flat or declined, compared to individuals from the past who had similar incomes or demographic profiles. Between 2005 and 2014, two-thirds of U.S. households saw their real market incomes either stall or drop.

The report paid particular attention to this 10-year period, because it contrasted with the income growth that households in advanced economies have generally enjoyed since World War II.

While the report found that the financial crisis of 2007-2009 and its subsequent slow recovery played a key role in this deterioration, this event was worsened by shifts in labor market conditions and demographic trends. The falling share of gross domestic product (GDP) going to wages, the rise of workplace automation and shifting demographics all played their part.

Financial Crisis and Recovery

Following the financial crisis, the global economy suffered one of the most severe recessions since the Great Depression. Once the nations of the world emerged from this downturn, many experienced recoveries that were rather sluggish.

The United States, for example, experienced GDP growth that averaged only 2.2% between the end of the recession in June 2009 and the end of 2014. This represents the weakest expansion of the post-World War II era. The figure of 2.2% was more than 0.5% below the rate experienced during the second-weakest recovery of the last 70 years.

In addition to this modest growth, inflation-adjusted wages have increased very little during the recovery. Private payrolls’ average hourly earnings have increased an average of roughly 2.1% a year, but after adjusting for inflation, real wages have barely grown at all, according to the Center on Budget and Policy Priorities.

Falling Wage Share

The wage share, the proportion of national income that is paid in wages, experienced a sharp change following the financial crisis. Before this event, an average of 18% of U.S. GDP growth went to median household income growth, according to figures provided by the report.

This figure dropped to 4% in the seven years following the recession, additional data included in the report showed. In addition to suffering this sharp decline, the portion of national income going to wages was undermined by changes in the labor market and demographic trends.

Demographic Shifts

While the incomes of most segments of the population either stalled or declined between 2002 and 2012, some demographic groups experienced a greater impact, the McKinsey report found. Less-educated workers, younger ones in particular, took a larger hit than those in other demographics. The report also noted that women, and single mothers in particular, were more likely to show up in lower income deciles.

Labor Market Shifts

The labor market experienced some structural changes between 2005 and 2014. One major variable affecting this market was automation. The rising use of personal computers has eliminated many clerical positions, and robots have taken the place of many machine operators in factories. Past that, “smart” machines have made it possible to automate many tasks that were previously considered beyond automation.

McKinsey’s report estimated that with technologies that are available or have been announced, companies could potentially automate tasks that account for 30% of the hours spent by 60% of U.S. employees.


Several variables helped income inequality rise between 2005 and 2014, a development that took place as two-thirds of American households saw their income either stay flat or decline. In addition to a financial crisis and lackluster recovery, labor market shifts, demographic trends and falling wage share all helped fuel this growing disparity.

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Is Social Security Going Broke?

My Comments: In 1983, when Social Security was on the verge of going broke, Congress made some changes to keep it alive and well. It’s again on the verge of going broke and there are ways to fix it.

But were not yet close enough to the edge of the cliff for there to be the necessary political will to fix it.

You have to remember, things only get done within the context of ONE ELECTION CYCLE. Absent that pressure, the can gets kicked down the road. The remedy won’t likely appear until 2030. If then.

Social Security is expected to run out of money by 2034. Here’s the problem. by Matthew Frankel \ Mar 26, 2017

You may have heard certain things about Social Security’s financial condition — maybe that the system is “broke” or that it won’t be able to pay benefits for much longer. Fortunately, statements like these are a bit of an exaggeration. Social Security’s trust fund has plenty of money in it for the time being, but this isn’t expected to last beyond 2034. Here’s the truth about the current state of Social Security’s finances and why it is projected to run out of money in about 17 years.

The current and projected financial state of Social Security

According to the 2016 Social Security Trustees Report, the most recent available, the Social Security trust fund had roughly $2.8 trillion in reserves at the end of 2015. What’s more, Social Security has run at a surplus since 1982 and is projected to do so through 2019. In other words, for the next three years, Social Security’s income from taxes and investment revenue will exceed the cost of the benefits it pays out.

Unfortunately, that’s where the good news ends. In the year 2020, Social Security is projected to start running annual deficits, which are expected to grow quickly and continue for the foreseeable future. In order to pay benefits, reserve assets from the trust fund will need to be redeemed. As a result, the Social Security trust fund is expected to be completely depleted by 2034. After this point, the incoming tax revenue will only be enough to cover about three-fourths of promised benefits.

To be perfectly clear, the reason Social Security is expected to start running annual deficits and eventually run out of money isn’t because of fiscal mismanagement or anything of that nature. Rather, it’s a simple cash flow problem.

Reason 1: Baby boomers are retiring

It all starts with the post-World War 2 “baby boom.” During the time period from the end of the war until about 1964, babies were being born at some of the highest rates in modern history. To illustrate this, here are the total fertility rates, defined as the number of babies born per woman throughout her lifetime, based on the birth rate of that year, throughout our recent history.

As you can see, there was a huge uptick in the number of babies being born in the post-war decades. Since then, the total fertility rate has held steady at around two children per woman.
The baby boomer generation is generally defined to be Americans born between 1946 and 1964. Therefore, this group represents Americans ages 53 to 71 today. In other words, this is the group that is starting to retire now, and will continue to reach retirement age over the next decade and a half.

Reason 2: Modern medicine has resulted in longer life expectancies

The other contributing factor to Social Security’s expected financial woes is that modern medicine has resulted in Americans living longer lives and therefore collecting Social Security benefits for a greater number of years.

According to the Social Security Administration’s (SSA) life tables, a man who was born in 1900 lived for about 13 years after reaching the age of 65. However, a man born in 1960 (a member of the baby boomers I discussed earlier) is expected to live roughly 18 years after reaching 65 years of age. And the life expectancy improvement is nearly as dramatic for females as well. In other words, the current group of retirees is expected to collect Social Security benefits for almost five years longer than the group of retirees 60 years prior.

And this trend is expected to continue going forward. As you can see in the chart below, the average person born in 2000 will live over two decades after reaching the age of 65.

More money flowing out than coming in

As a result of this combination of baby boomers retiring and senior citizens living longer lives, there will be far fewer workers paying Social Security tax for each beneficiary receiving retirement benefits. Image source: 2016 Social Security Trustees Report.

As you can see, from 1980 until almost 2010, the ratio stayed steady at 3.2-3.4 workers paying into Social Security per beneficiary. As of 2016, this ratio has already dropped well below 3-to-1, and is expected to decline rapidly over the next few decades, reaching a level of just 2.2 workers per beneficiary by 2035.

What can be done?

The good news is that there is still time to fix the problem, and there are two main ways it can be done.

• Decrease benefits, which could come in the form of an across-the-board cut, or increase the full retirement age, cut benefits to wealthy retirees, or several other ways.
• Raise Social Security taxes. The current tax rate is 6.2% for employers and employees, assessed on up to $127,200 of earned income. So, a tax increase could either be a higher tax rate or a raising or elimination of the taxable wage cap.

There’s no way to predict the eventual reform package that will be passed, but history tells us that something will be done. It’s just a matter of how long it will take Congress to act and what the eventual solution will look like.

Image sources: Social Security Administration.

A 60-40 Portfolio Could Return Less Than A Savings Account

My Comments: How fast will your money grow?

An expectation of growing money at an annual rate of 7% to 10% going forward is probably unrealistic.

Interest rates and inflation rates are relatively low, and global economic growth rates are likely to slow down over the next two decades. See my earlier posts to understand this: and

June 30, 2017 • Christopher Robbins

Over the next decade, the traditional 60-40 portfolio will post average lower annual returns than many online bank accounts do today, according to a web tool from Newport Beach, Calif.-based Research Affiliates.

A portfolio consisting of 60 percent equities and 40 percent bonds will post average annual real returns of just 50 basis points over the next decade, said Jim Masturzo, Research Affiliates’ senior vice president, asset allocation, on a Wednesday webcast.

“Investing is hard, and this market will kick you in the teeth,” said Masturzo. “The focus should be on how do we create portfolios well-positioned for the future that are able to meet our future spending obligations. For a majority of investors, risk is failing to meet their long-term spending needs.”

Masturzo explained that most of the firm’s assumptions lie on projections for 50 basis points of annual growth from large-cap stocks. The S&P 500 is projected to produce an average annual dividend yield of 2 percent and long-term earnings growth of 1.3 percent, but lose 2.8 percent in valuation annually.

By comparison, annual percentage yields of 1 percent or more are available in online savings accounts from Ally and Synchrony, and online checking accounts from Aspiration.

The low return estimate might come as a shock to some investors, admits Masturzo. In equities markets, earnings growth has failed to keep up with rising stock prices, while fixed-income returns will continue to be muted by low short-term interest rates and monetary tightening by central banks.

Yet a 60-40 portfolio had returned 4.9 percent net of inflation year to date through May 31, said Masturzo, with the Bloomberg Barclays U.S. Aggregate Bond Index yielding 1.2 percent, while U.S. large-cap stocks have returned 7.4 percent—a “spectacular rise in the markets.”

“The most common question we hear is: ‘Can this continue?’” said Masturzo. “I don’t know, but history tells us that it is unlikely.”

During the webcast, Masturzo used Research Affiliates’ newly updated Asset Allocation Interactive (AAI) tool to visually demonstrate the firm’s projections for future returns across asset classes, geographies and factors.

Research Affiliates predicts that there is a less than 1 percent chance that a traditional 60-40 portfolio will be able to post real returns of 5 percent or more over the next decade. The company assumes that the portfolio will generate a 2.4 percent average annual net yield, but an average annual valuation change of 1.9 percent.

A portfolio offering a 5 percent average annualized return is still possible, said Masturzo, but advisors would be better off optimizing returns through diversification and rebalancing than by adding risk.

Masturzo said that advisors and investors will have to think beyond traditional investments to generate yield and growth.

“Opportunities do exist beyond mainstream stocks and bonds to take advantage of asset classes with lower valuations or attractive cash flows,” Masturzo said. Yet most advisors are diversifying within highly correlated areas of the market and not across asset classes. Higher returns might be found in credit markets, commodities, REITs and private investment opportunities, and within non-U.S. markets.

Investors might also consider active strategies to produce differentiated returns, said Masturzo.

“Alpha is an important part of this discussion, especially when you’re talking about expensive asset classes,” he said. “We’re big believers in adding value through contrarian trading.”

At the heart of the tool is a scatterplot of risk and return demonstrating historical data or expectations from Research Affiliates projecting an efficient frontier defining a normal distribution around a portfolio’s probable returns.

The AAI tool is an interactive web tool that provides expected return data across more than 130 assets and model portfolios. The tool allows advisors to create and customize their own portfolios, or to blend existing portfolios to view expected and optimized returns and risk across five different currencies, and to discover correlations within their portfolios.

AAI also allows users to view cyclically adjusted price-to-earnings (CAPE) ratios across equity markets and compare them with each other, or compare current valuations against the historical range for each market.

During his demonstration, Masturzo used the AAI tool to show that, based on the Research Affiliates projections, increasing the volatility of a 60-40 portfolio by 14 percent by diversifying away from bonds and U.S. stocks is still not enough for it to reliably post 5 percent average annualized returns.

“Increasing volatility tolerance is a bad approach to achieving 5 percent real returns,” said Masturzo. “For those who want to do so, we believe you should approach a maverick approach to risk and add value beyond a passive approach by accessing contrarian advice within asset classes.”

Protectionists Are Wrong About Unemployment

My Comments: This doesn’t tell the whole story. But it helps. And, yes, this does have political implications.

Make America Great Again is a very complicated matter. What a surprise. And you thought it would be easy and would happen overnight after we drained the swamp. Well…

Donald Boudreaux is a senior fellow with the F.A. Hayek Program for Advanced Study in Philosophy, Politics, and Economics at the Mercatus Center at George Mason University, a Mercatus Center Board Member, a professor of economics and former economics-department chair at George Mason University. He writes:

What I think is missed is the average income for those employed. We know there is an increasing disparity between those at the top and those at the bottom. We have to find a way to turn this around, or there will be more than just rioting in the streets. It’s in our best interest to do this, not just for those in the middle and the bottom, but also for those at the top. If no one can afford what those at the top are offering, no one will buy it.

The following quote is from pages 30-31 of my Mercatus Center colleague Daniel Griswold’s excellent 2009 volume, Mad About Trade (footnotes excluded):

In the past four decades, during a time of expanding trade and globalization, the U.S. workforce and total employment have each roughly doubled…. Since 1970, the number of people employed in the U.S. economy has increased at an average annual rate of 2.22 percent, virtually the same as the 2.25 percent average annual growth in the labor force. Despite fears of lost jobs from trade, total employment in the U.S. economy during the recession year of 2008 was still 8.4 million workers higher than during the 2001 recession, 27.6 million more than during the 1991 recession, and 45.8 million more than the 1981-82 downturn.

Nor is there any long-term, upward trend in the unemployment rate. In fact, even counting the recession year of 2008, the average unemployment rate during the decade of the 2000s has been 5.1 percent. That rate compares to an average jobless rate of 5.8 percent in the go-go 1990s and 7.3 percent in the 1980s.

After decades of demographic upheaval, technological transformations, rising levels of trade, and recessions and recoveries, the U.S. economy has continued to add jobs, and the unemployment rate shows no long-term trend upward. Obviously, an increasingly globalized U.S. economy is perfectly compatible with a growing number of jobs and full employment.

Retirement Can Be Hard

My Comments: Retirement means different things to each of us; it may be when we quit a long career, or we need something less intensive, our current employer sucks, or maybe we simply stop working. If you’ve been disciplined, it’s time to let your money start working for you, always assuming you have some. But it can still take a lot of work to get it right.

These remarks by Rodney Brooks from the Washington Post are a great summary of the issues that need to be thought about as you start the transition to retirement. But don’t take what he says without relating it to your personal circumstances. There are lots of “what if’s” to consider. It will also be helpful to those of you who think you are already in retirement.

By Rodney Brooks, on October 15, 2016

We get busy in life. Between raising a family, starting a career, buying a home and then eventually sending the kids to college, it’s not a big surprise that retirement planning takes a back seat.

Some people don’t even start thinking about retirement until they are in their 50s. That’s late. But still, you should never throw your hands up and give up on retirement planning. And even though I say it’s never too late to start, you may have to deal with some unfortunate realities.

The fact is that retirement can be overwhelming. There’s a lot to do and a lot to think about. Which is why even people who think they are well prepared for retirement might find that there are things for which they simply forgot to plan, or didn’t know they needed to plan.

Financial planners describe some of those things:

The emotional side

“There’s been a lot of times when people aren’t prepared emotionally to retire,” says Scott Thoma, at Edward Jones in St. Louis. “Your identity has been what you did. You stop working. You stop you career. The question is now, what will I do with my time? A lot of people go back to work because they weren’t ready mentally or emotionally for retirement.”

Enrolling in Medicare

“You still have to enroll in Medicare at 65,” says John Piershale, a wealth adviser at Piershale Financial Group in Crystal Lake, Ill. “If you delay until 66, you have to take the initiative. It doesn’t happen automatically. If you are late, there is a 10 percent penalty for every 12 months you are late. If someone waits 24 months, there is a 20 percent penalty built in. It’s a permanent penalty, just because you forget to re-enroll. That is a big-time penalty.

“Enrollment is three months before your birthday to three months after your [65th] birthday,” he says. “A lot of people delay Social Security. If you delay Social Security, you have to actively enroll in Medicare on your own.”

Health-care costs

“A lot of studies say health care will cost $250,000” for a couple in retirement, Thoma says. “That number is about $5,000 per year per person. You can’t predict the future, but you can plan for it.”

People may plan for but underestimate health-care costs in retirement, says Scott Moffitt, president of the Summit Financial Group in Loveland, Ohio.

“People forget prescription drug costs and long-term care are costs,” Moffitt says. “They can eat up a substantial amount of money if you are not careful. “

Ditto dental expenses, says John Gajkowski at Money Managers Financial Group in Oak Brook, Ill: “A lot of people have work done. Medicare doesn’t cover dental. They are having [dental] posts put in, and that can cost $10,000, $20,000, $30,000.”

Major purchases and repairs

“They forget to plan for major purchases, like home repair and upkeep,” Moffitt says. “Retirees tend to do a good job of covering monthly bills. What seems to be getting many retirees caught up is that occasional large purchase. The first piece of advice I give them is to look at your budget on an annual basis so you are making sure you take into account things that come up quarterly or semiannually.

“If they go into retirement with cars owned, put in the replacement cost,” he says. “Put in home upkeep.”

Life events, such as weddings, graduations and sometimes just spoiling the grandkids, can be major unanticipated costs, Gajkowski says.

Planning for a long life

“Planning for a long life is very important,” Thoma says. “For a 55-year-old couple, there is a 50 percent chance that one of them will live into their 90s. If you will live to 90, will your money last? Are there changing needs, like how your home was set up? Does your home have a lot of stairs? Do you want to downsize? There are a lot of considerations as you think about 25 years in retirement.”

Needs of a surviving spouse

Consider which streams of income are attached to one spouse that may go away when he or she dies, especially pensions, annuities and Social Security. “Do a ‘what if’ analysis,” Thoma says. “If one passes away, will the other be covered? Are there income streams that will stop? Think about long-term care. If one passes away, who will help the other?”
Legal affairs, estate planning

“A lot of people think estate plans are only for the wealthy,” Thoma says. “They say, ‘I don’t have a lot of money, so I don’t need an estate plan.’ If you are not proactive, all those decisions will be he handled by the state. Do you want to leave it in the hands of the state and the court?”

Make sure all your beneficiaries are correct and up to date. Also, make sure you have a financial power of attorney and health-care directive.

“How do you want your assets to be handled if you are no longer able to make those decisions?” Thoma says. “One thing we recommend is having a family meeting — with your family and your financial adviser. What are your wishes? Make sure family understand your desires.”

The Next Recession

My Comments: It’s a given there will be a ‘next recession’. People much smarter than me say it’s not many months away. It’s a normal event and we’ll most likely survive.

What we may not survive, however, apart from a random collision with an asteroid, are the effects of income inequality across the planet and the massive debt overhang facing us in this country. Combine those two forces and you know there’s going to be chaos down the road.

Olivier Garret, Forbes Contributor / Jun 26, 2017

In the coming years, we will have to deal with the largest twin bubbles in history. It’s global debt (especially government debt) and the even larger bubble of government promises.

Together, these twin bubbles make up what investor John Mauldin calls “The Great Reset.” Nobody can tell how this crisis will play out, but one thing is for sure, it will affect everyone in a big way.

The Debt Burden Is at a Breaking Point

The mere existence of these bubbles has profound economic implications, as research shows high debt levels weigh heavily on economic growth.

The total debt-to-GDP ratio is at 248% today. The non-partisan Congressional Budget Office (CBO) projects it will rise to 280% by 2027. And that’s assuming nominal GDP grows at 4% per annum.

Despite the post-election optimism, nominal GDP growth in 2016 was just 2.95%—making it the fifth-worst year on record since 1948. There are no signs it will pick up soon either.

That means the reality may be even gloomier than what the CBO projects.

If a higher debt burden means lower growth, the recovery from the next recession, whenever it arrives, will be even slower than the last.

Now Count in Government Promises

Those sky-high debt-to-GDP ratios don’t factor in the unfunded liabilities—pensions, Medicare, and Social Security, which the US Government has promised to millions of Americans. Those total about $100 trillion today.

The chart below shows that by 2019 those unfunded liabilities, along with defense and interest, will consume ALL tax revenue:

Last year, the first baby boomers turned 70. The average boomer has just $136,000 in retirement savings. If that individual lives for 15 years after retirement, his annual income comes to just $9,000.

Because boomers are living longer and need income, they’re staying in the job market longer. The fastest employment growth now is among people 65 and older.

However, with 1.5 million boomers turning 70 every year for the next decade, a huge strain will be put on government finances in the form of pensions and Social Security.

But the pension crisis isn’t just in the US.

A Citibank report shows that the OECD countries face $78 trillion in unfunded pension liabilities. That is at least 50% more than their total GDP.

Pension obligations are growing faster than GDP in most, if not all, of those countries. Those obligations sit on top of a 325% global debt-to-GDP ratio.

Prepare in Advance

Politicians and central bankers could try to “fix” these problems in several ways.

They could default on the debt and pension obligations, or they could print money to fund them. There is no way of knowing ahead of time how these bubbles play out.
What we do know is the chosen approach will bring a different type of volatility and effect on the markets.

For investors, this will be a period of enormous volatility.

That’s why it’s essential to arm yourself with the knowledge of how to deal with this volatility ahead of time.

When Will the Bull Market End?

My Comments: Be assured, I have no idea. But then, I don’t know what I’m going to have for lunch either. All I know is that I will have lunch and one of these days, this bull market will end.

The trick is to understand that it will end, and if you’re not ready to watch a ton of your money disappear, then you have to be ready. Some of you may have enough money that you really don’t give a damn. Good for you.

But if you worry about this, even a little bit, then you should talk with someone who has some answers. Someone you can relate to. I promise it won’t hurt much.

By Anne Kates Smith, Senior Editor @ Kiplinger, June 26, 2017

As the second-longest bull market in history makes its way into its ninth year, many investors are understandably asking: When will it end? We’d all be rich if there was a foolproof way to figure that out. But we can make some educated guesses.

One thing to remember is that bull markets don’t die of old age alone. Something’s got to kill them. And the surest weapon is a recession. That’s not always the case. There have been bear markets without a recession, as the crash of 1987 shows. But many of the worst downturns have been accompanied by a recession – or, more accurately, followed by one. The Great Recession that began in December 2007 was preceded by the start of a bear market in October of that year that went on to lop 57% off stock prices. The recession that began in March 2001 followed a March 2000 market peak that initiated a 49% stock decline.

False alarms are frequent, says economist and market strategist Ed Yardeni, of Yardeni Research. “The next bear market will start when the market anticipates the next recession – and turns out to be correct. The market has anticipated lots of recessions since 2008 that have turned out to be buying opportunities,” says Yardeni.

When recessions do pair with stock market peaks, they can do so immediately, as with the concurrent start of the recession and bear market of July 1990, or they can lollygag more than a year behind. On average, recessions begin 7.7 months following a stock market peak, according to market research firm InvesTech Research.

If we only knew when the next recession would begin. Well, Yardeni has a date in mind: March 2019. He bases his determination on the average number of months the economy has continued to expand after it has reached its previous peak, going back to the early 1970s. Counting from November 2013, which is when the economy finally surpassed its 2007, prerecession peak, Yardeni arrives at March 2019.

The date is not an official forecast, says Yardeni, who adds that it comes with no guarantees and plenty of questions. “What do we know today that suggests that March 2019 is a realistic date, or that a recession will come sooner or later? Right now, March ’19 looks realistic,” says Yardeni. “But if pressed,” he adds, “I’d say it might be later.” If the economic cycle sticks to the averages and if the stock market does, too – both big “ifs” – then investors should look for a market top around August of next year.

4 signs of recession

Sam Stovall, chief investment strategist at investment research firm CFRA, looks at four indicators when he’s searching for a recession on the horizon. Every recession since 1960 has been preceded by a year-over-year decline in housing starts, says Stovall. The dips have ranged from a 10% decline to a drop of 37%, and they have averaged 25%. The most recent report on housing starts showed a decline of less than 3%. “So we’re on yellow alert, not red,” says Stovall.

Consumer sentiment is another signpost. Before a recession kicks in, you’ll typically see an average decline of 9% in the University of Michigan’s monthly sentiment index compared with the previous year, says Stovall. Current reading: up 2.4%.

A drop over a six-month period in the Conference Board’s Index of Leading Economic Indicators means trouble, too, with declines of 3%, on average, registering ahead of an economic downturn. Latest six-month change: up 3%.

Finally, when yields on 10-year bonds dip below the yields on one-year notes – known as an inverted yield curve – look out, says Stovall. Ominously, long-term rates recently have been under pressure while the Federal Reserve pushes short-term rates higher. “We’re getting a flatter yield curve, but nowhere near an inversion,” says Stovall. His conclusion: No recession is in sight.

Before you fixate on the twin risks of recession and a bear market, ponder a third risk – exiting a bull market too early. The payoff in the final year of a bull market is historically generous, with returns, including dividends, averaging 25% in the final 12 months and 16% in the final six months.

Nonetheless, investors have every right to ratchet up the caution level at this stage of the game. Now is a good time to make sure your portfolio reflects your stage in life and your risk tolerance. Stick to a regular rebalancing schedule to lock in gains and maintain the appropriate balance between stocks, bonds and other assets, domestic and foreign. And whatever you do, make sure your portfolio is where you want it to be before you go on summer vacation next year.