Tag Archives: investment advice

How your 401(k) can survive and thrive in the next bear market

My Comments: Some of you reading this have money in 401(k)s and 403(b)s and cannot simply remove it and place it somewhere safer. Which means you’re completely exposed to the vagaries of the markets and you can only hope for the best.

I learned long ago that HOPE is not an effective investment strategy. So these words from Adam Shell may make your life a little easier. If you want more information, you know how to reach me.

Adam Shell, March 9, 2018

The nine-year stretch of rising stock prices won’t last forever. So now’s a good time for investors to bear-proof their 401(k)s before the next financial storm.

The current bull market, now the second-longest ever and celebrating its 9th birthday on Friday, is most likely in its final stages, Wall Street pros say. That means a bear market will occur at some point, and the stock market will tumble at least 20% from its peak.

What could cause it and when? No one can know for sure. A recession perhaps, or a surge in interest rates and inflation? An unexpected event or investors getting too giddy about stocks and driving prices up to unsustainable levels? All could be the triggers of a big drop in stocks.

Remember, if you have any money invested in stocks, you won’t be able to avoid all the pain that a bear inflicts on your 401(k). While a drop of 20% from a prior peak is the classic definition of a bear market, most drops are more sizable. The average decline for the Standard & Poor’s 500 stock index in the 13 bears since 1929 is 39.9%, S&P Dow Jones Indices says. A swoon of that size would shrink a $100,000 investment in an index tracking the broad market to roughly $60,000.

Prepare ahead of time

“The best way to survive a bear market is to be financially prepared before one happens,” says Jamie Cox, managing partner for Harris Financial Group.

That means not having 100% of your money invested in stocks near a market top. It also means maintaining low levels of debt and having some emergency savings to avoid having to sell stocks in a down market to raise cash, he says.

From a portfolio standpoint, make sure your investment mix isn’t too risky. Are you loaded up on high-fliers that have greater odds of suffering steep drops if the market tanks? Make sure you own some “defensive” stocks, such as utilities, consumer companies that sell everyday staples like soap and cereal, or health care names, which tend to hold up better when markets fall overall.

“Investors should take the time to control the parts of their portfolios they can control,” Cox advises.

If, for example, your portfolio was designed to have 60% in stocks, and that percentage has ballooned to 80% due to the long period of rising stock prices, consider “rebalancing” your portfolio now. Sell some stock to get back to your initial 60% target.

Play defense

The time to be aggressive in the market is when stocks are up, and you can make tactical moves likes cashing out stocks, says Woody Dorsey, a behavioral finance expert and president of Market Semiotics, a Castleton, Vt.-based investment research firm. It makes more sense, he adds, to be defensive when the market is entering or in a period of falling prices.

“Does a bear market mean an investor needs to freak out? No. But it does mean you should be more careful,” Dorsey says. “If the market is going to be difficult for one or two years, just get more defensive. Keep in simple.”

One simple strategy to employ is to get “less exposed to the market and raise cash,” Dorsey says. “Most people are not used to that message, but it’s a good message.” While a normal portfolio might consist of 60% stocks and 40% bonds, a bear market portfolio, he says, might be 30% cash, 30% U.S. stocks and the rest in foreign investments and bonds.

Main Street investors could also consider defensive strategies employed by professional money managers, he says. They can buy things that hold up better in tough times, such as gold. Or add to “alternative” investments that rise when stocks fall, such as exchange-traded funds that profit when market volatility is on the rise or funds that can short the market, or profit from falling prices.

Identify severity of bear

The next bear isn’t likely to be as severe as the epic one following the Great Recession or the dive in early 2000 after the dot-com bubble burst, says Liz Ann Sonders, chief investment strategist at Charles Schwab. Both of those bears saw market drops of about 50% or more.

“The next bear will be a more traditional one that likely comes from the market sniffing out a coming recession,” she explains. “We don’t think it will be caused by a global financial crisis or bubble bursting.”

That means fear levels likely won’t spike quite as high. Investors will also have a better idea of when the bear market might hit, as it will be foreshadowed by signs of a slowing economy.

It also suggests the market will likely rebound more quickly than the average bear of 21 months. As a result, employing basic investment principles, such as portfolio rebalancing, diversification and buying shares on a regular basis, which forces folks to snap up shares when prices are cheaper, can help investors emerge from the next bear market in decent shape.

“Diversification and rebalancing are boring to talk about,” says Sonders. “But they are more useful strategies than all the hyperbole on when to get in or get out of the market, which is not an investment strategy.”

Buy the ‘big’ dips

There are big market swings even in bear markets. A way investors can play it is to buy shares on the days or periods when stocks are under intense selling pressure. “There will be lots of wild swings,” says Mike Wilson, U.S. equity strategist at Morgan Stanley.

Investors have to take advantage of stock prices when they are depressed and present good value, he says, even if it seems like a scary thing to do at the time.

“You have to be willing to step in” when market valuations fall a lot, no matter what’s going on in the world, Wilson advises.


Forecasting the Next Recession

My Comments: I may have retired from providing investment advice but I’ve not yet left the building. What happens in the world of money still interests me both professionally and personally.

Attached to this post, by way of a link to a 12 page, downloadable report, is a projection from Guggenheim that says we’ll experience a recession roughly 24 months from now.

Whether they are right or wrong, the next one is somewhere on the horizon. Knowing in advance when it might happen will help manage the financial resources you have that pay for your retirement.

Just don’t confuse the timing of a recession with the timing of market corrections of 10% or more. While there is some correlation, it is far from 100%. Also keep in mind the stock markets price things based on what people THINK will happen, not what actually does happen.

Here’s the link to download a copy of the report: Forecasting the Next Recession.

The Perfect Storm (Of The Coming Market Crisis)

My Comments: We do not live in a perfect world. Flaws are all around us. As responsible adults, we always try to make good decisions, and mostly we succeed. Until we don’t.

If you expect to live another 20 or 30 years, the money you’ll need to pay your bills has to come from somewhere. If you’ve already turned off the ‘work for money’ switch and retired, you’re dependent on work credits and saved resources. Maybe you have a pension that sends you money every month. Good for you.

If you are still working, you’re probably setting aside some of what you earn so you can someday retire and get on with the rest of your life without financial stress. At least that should be your plan.

This article from Lance Roberts, a professional money manager, needs to be read and understood. I’m not going to copy everything he says, but I do encourage you to follow the link I’ve put below. Make an effort to understand what he’s telling us. Your financial life may depend on it.

Know also there are ways to shift the risk of loss to a third party. For a fee, you get to enjoy the upside and avoid the downside. If you do live for another 20 – 30 years, where is your money going to come from?

Lance Roberts published this today, November 28th, and it can be found HERE.

A Stock Market Crash In 2018?

My Comments: Last Monday, I posted comments from three people who said with conviction there was no reason to expect a market correction any time soon.

Today I have someone with no discernable name who says, also with conviction, that we’ll have one next year.

Here’s my take on this: if you are 60 years old or more, prepare for a correction. If you are less than 60 years of age, ignore all this, put your money to work and don’t worry about it.

Now, do you feel better?

November 7, 2017 from GoldSilverWorlds.com

The U.S. stock market is in amazing shape. Every day new all-time highs are set. This must be bullish, and investors should go all-in, right? Well, not that fast, at least not in our opinion. We see many signs that this rally is getting overextended, from an historical perspective. While we clearly said a year ago that we were bullish for this year, we did not see any stock market crash coming (a year ago). Right now, we are now on record with a forecast of a stock market crash in 2018, and it could take place as early as the first weeks / months of 2018.

So far, in all openness and transparency, our warning signals for a mini-stock market crash in November were invalidated. We were horribly wrong in terms of timing. However, we still believe there is a huge risk brewing for a mini-crash. The stronger the current rally, the stronger the fallback.

Yes, we do expect a strong mini-crash in the stock market in 2018, starting early 2018. Central banks will likely step in to avoid a similar chaos as in 2008/2009, so we don’t forecast the end of the financial system.

We do, however, believe a very stiff correction will take place, which potentially could bring a buying opportunity (to be confirmed at that point in time based on intermarket dynamics). More likely, however, we believe that money will rotate out of U.S. stocks into emerging markets. That is why we are very bullish emerging markets in 2018.

The first warning signs of a stock market crash

We published the following warning signs starting in August:
• Is Volatility Making A Higher Low Here?
• Volatility On The Rise As Expected. What’s Next For Stocks?
• Ignore This Series Of Volatility Warning Signs At Your Own Peril
• Volatility Hit Historic Lows This Week. Maximum Complacency Is Bearish!

But the number of concerning indicators is accumulating now. Yes, it may sound as foolish as it can be that right during a strong bull market rally InvestingHaven’s research team talks about concerning indicators. But let’s first deep-dive before you come to a conclusion.

The Dow Jones Industrials chart is one of those concerning charts. The area indicated with “0” shows that the index has risen with more than 30% in 12 months without any meaningful correction. This rally may be amazing, but it is reaching a level never seen before in the past 12 years (including the 2007 rally and major top). All other instances of a 30% rise in 12 months are indicated on this chart (from 1 till 5):
• The 2013 rally (“5”) was as powerful as the current one, but resulted in a mini-crash just 3 months later.
• All other rallies (“1” till “4”) resulted in a strong correction or mini-crash within or right after the 12-month rally.

The current U.S. stock market sentiment shows extreme greed, according to the CNN Money fear & greed index.

In the past 3 years, the Fear & Greed index reached similar levels of bullishness only twice. This bull run is overextended on the short-term time frame for sure.

The stock market breadth, an indicator of strength of market internals, is suggesting that this rally is driven by a minority of stocks. As the broad indexes move higher, there are fewer stocks participating in the rally. Not a good sign.

4 charts suggesting a stock market crash in 2018 based on historical data

Let’s put the current stock bull market in historical context. As the charts speak for themselves, we believe they suggest a stock market crash is brewing, and it could start as early as the first days or weeks of 2018.
The first chart shows the strongest bull markets in the last 80 years. Visibly, the current bull market, which started in 2009, is now close to being the strongest ever. The current strong rally, which comes after an 8-year bull run, is a concerning factor, according to us.

Note from TK: To see these four charts and read the short accompanying text, GO HERE:

How this Bull Market Will End

My Comments: Once again, our assumptions about the future of the current bull market are challenged. I want these writers to be right, and that too is a challenge for me. I share it with you here in hopes it gives you a better idea about what to do with your money.

By Krishna Memani, Brian Levitt & Drew Thornton | August 15, 2017

This secular bull market—the least loved in memory—is now more than 100 months old, and up by 265% from its bottom on March 9, 2009. It is also the second longest bull market on record (after the 1990s’ dot-com boom) and fourth largest in terms of market advance.

For some investors, the sheer age of this cycle is enough to cause consternation. Yet there is nothing magical about the passage of time. As we have said time and again, bull markets do not die of old age. Like people, bull markets ultimately die when the system can no longer fight off maladies. In order for the cycle to end there needs to be a catalyst—either a major policy mistake or a significant economic disruption in one of the world’s major economies. In our view, neither appears to be in the offing:

• Global growth is sufficiently modest. The “accidental” synchronized global expansion (so-called accidental because it was more of a coincidence than a coordinated effort by global policymakers) is already fading, but slowing growth in the United States and China does not foretell a crisis.

• The United States, nine years into this market cycle, has not exhibited the excesses that are indicative of typical economic downturns.

• For its part, China’s high leverage poses a threat to its financial stability, but government actions are likely to be gradual to ensure a phased pace of deleveraging while maintaining growth stability.

• We believe that low inflation globally will provide cover for policymakers to be more accommodative than many expect.

We are optimistic that this cycle will ultimately be the longest on record, though we do not believe our view is Pollyannaish. We will continue looking out for telltale signs indicating the end of the current cycle, even as we believe that none of them are forthcoming:

1. U.S. and/or European inflation increases more rapidly: If inflation picks up meaningfully in the developed world and tighter policy commences, then the cycle will likely be curtailed.

2. High-yield credit spreads widen: The bond market is usually a good indicator of the end of a cycle. Cycles end with the yield curve inverting and high-yield credit spreads blowing out. An equity market sell-off typically follows soon thereafter.

3. The 10-Year U.S. Treasury rate falls and the yield curve flattens: The 10-Year Treasury rate will reflect the real growth and inflation expectations of bond market participants. A flattening yield curve driven by the decline of long-term rates would be an ominous sign for the U.S. and global economy.

4. The U.S. dollar strengthens versus emerging market currencies: A flight of capital from emerging markets to the United States would slow growth among the former—which are major drivers of economic activity—and potentially cause another earnings recession for U.S. multinational companies.

Note: There is a white paper published by Oppenheimer Funds with 18 charts in support of the authors argument that the current bull market will not end soon. You can find it HERE.

One Of The Most Overbought Markets In History

My Comments: As someone with presumed knowledge about investing money, my record over these past 24 months has been pathetic. I’ve been defensive, expecting the markets to experience a significant correction “soon”…

I lived through the crash of 1987, the crash in 2000, and then the Great Recession crash in 2008-09. I saw first hand the pain and chaos from seeing one’s hard earned financial reserves decimated almost overnight.

Only the crash hasn’t happened. But every month there are new signals that one is imminent. And still it doesn’t happen.

I’ll leave it to you to decide if what Mr. Bilello says makes any sense. I’m not sure it does.

by Charlie Bilello, October 22, 2017

The Dow is trading at one of its most overbought levels in history. At 87.61, its 14-day RSI is higher than 99.999% of historical readings going back to 1900.

(Note: Developed by J. Welles Wilder, the Relative Strength Index (RSI) is a momentum oscillator that measures the speed and change of price movements. RSI oscillates between zero and 100. Traditionally, and according to Wilder, RSI is considered overbought when above 70 and oversold when below 30. Signals can also be generated by looking for divergences, failure swings, and centerline crossovers. RSI can also be used to identify the general trend. TK)

Sell everything?

If only it were that simple. Going back to 1900, the evidence suggests that such extreme overbought conditions (>99th percentile) are actually bullish in the near term, on average.

Come again? In the year following extreme overbought readings, the Dow has actually been higher roughly 70% of the time with an average price return of 14.2%. From 5 days forward through 1-year forward, the average returns and odds of positive returns are higher than any random day. While the 3-year and 5-year forward returns are below average, they are still positive.

Does that mean we’ll continue higher today? No, these are just probabilities, and 30% of the time the Dow is lower looking ahead one year.

What it does mean is that one cannot predict a market decline based solely on extreme overbought conditions. Declines can happen at any point in time and “overbought” is neither a predictor nor a precondition of a bear market to come.

If one is going to predict anything based on extreme overbought conditions (and I would advise against doing so), it would be further gains. I realize that doesn’t conform to the conventional narrative of “overbought = bearish,” but the truth in markets rarely does.

The Middle-Class Squeeze Isn’t Made Up

My Comments: Are you a middle-class American? I used to be and may still be, but those like me are a dying breed. The economic devastation now engulfing a huge portion of Texas is going to reverbrate across the nation. Apart from the humanitarian crisis, it will add to the unseen crisis affecting middle class America.

Economic inequality led to the downfall of the Democratic Party last November. It’s manifest by the lower economic expectations of those who live in rural America, by those whose education is no longer enough to get ahead, and still pervasive social discrimination against those not white enough. To Trumps credit, he saw the problem and built a movement, even if he is likely to waste the opportunity.

Like many ‘economic’ essays, this may be hard for you to get through. But to the extent you want to preserve the underlying goodness of this nation, and protect yourself along the way, you would benefit from a better understanding of the problem.

By Barry Ritholtz / Feb 15, 2017

Benjamin Disraeli is reputed to have said “There are three type of lies: lies, damn lies and statistics.”

Today let’s address the third component of Disraeli’s formulation in the context of a recent National Review article with the headline, “The Myth of the Stagnating Middle Class.” The article observes that “more Americans have easier lives today than in years past.”

To regular readers, this is a variant of the assertion that “common folk live better today than royalty did in earlier times,” a claim we debunked two years ago. The current argument is more nuanced in that it: a) relies on a few statistical twists; b) contains statements that are true but don’t support the main claim; and c) is an argument against Donald Trump’s populism from the political right. It all has the general appearance of plausibility until you start digging.

This is where we come in.

Let’s begin with the claim that more Americans have easier lives today than in years past. This is true and almost always has been. Progress is humanity’s default setting ever since our ancestors climbed down from the trees and began walking upright on the African savanna.

Thus, it should come as no surprise that the standard of living for all Americans has been rising for many years, mainly because of technological advances. However, the main issue under discussion is actually about how the economic benefits of the U.S. economy get apportioned across the populace.

In other words, how the wealth is distributed. The National Review engages in a statistical sleight of hand that distracts from this.

For further insight I spoke with Salil Mehta, who teaches at Columbia and Georgetown, and is perhaps best known for his role as the top numbers-cruncher in the federal government’s $700 billion TARP bank bailout plan in the financial crisis.

Mehta made short work of the article:
The article is a peculiar mixture of motivating facts and fantasy logic, which is what makes cherry-picking statistics unsafe for policy conversation. The main issue with the piece is that that it continuously mixes and matches data to fit a fated narrative.

Mehta further observed that the National Review argument included in some cases various classes of Americans (such as minorities and immigrants), while excluding them at other times in statistics. This kind of data cherry-picking is always a red flag.

Consider for a moment how the Pew Research Center did its big research report, “The American Middle Class Is Losing Ground”: The report, which actually figures in the National Review article, analyzed the Current Population Survey from 1971 to 2015. It used data drawn from the Bureau of Labor Statistics, which has well-established standards for managing data and making empirical comparisons.

Maybe it’s best to make the point with two of the more telling charts in the report. Here’s the first one, showing that income growth for the middle class has trailed that of the upper class:

The second chart (below) shows that the wealth gap between the upper and middle classes also widened significantly (even after the losses from the financial crisis):

Best practice in these circumstances is to go to the original data source, cite it and analyze it in a way that is consistent, regardless of whether the outcome supports your conclusion.

As I’ve said before, there are many reasons to dislike this economic recovery: it has been lumpy and unevenly distributed by geography, by industry and by level of educational attainment. Much of that has harmed people who were once considered middle class. Add to this the decades-long impact of automation, globalization and the decline in labor’s bargaining power, and it adds up to economic stagnation for the middle class.

But wage and wealth stagnation alone don’t account for the full measure of middle-class angst. Inflation and its components also play a part. Prices for things we want have been deflating, while the cost of things we need have been going up. Mobile phones, computers and flat-panel TV are better and dollar-for-dollar cheaper than ever. The same is true for cars, which in a few years will likely be self-driving.

But those are mostly wants. When it comes to needs, it’s a different story. Housing, even after the 2008-09 crack-up, is expensive. Rentals have gone straight up as home ownership has fallen. The costs of education have skyrocketed and show no signs of slowing. Medical and health-insurance costs are among the fastest-rising of all consumer expenses.

The National Review article concludes by saying, “Government can’t fix that problem, because that problem doesn’t really exist.”

Wishing that a problem doesn’t exist doesn’t make it vanish. But it does offer some insight into why the Republican Party was blindsided by the rise of Donald Trump and his populist appeal. It isn’t that the party elite was myopic, but that it actively fabricated a bubble into which no contrary information was allowed entry. The troubling thing is that the GOP is still at it.

Middle-class anxiety has been building for more than a decade and it mixed in the last election with a general sense of frustration with America’s leadership class. No wonder the middle class feels squeezed — because it is.