When you look down the road of life, the items closest in time loom largest and seem most significant. But over a lifetime we learn that while items far away may appear small, they can actually be larger, and much more important.
When I started writing market commentary many years ago, one of my goals was to have a place where I could help clients gain some perspective on the daily gyrations in the financial markets. Bringing over 45 years of experience in them, perhaps I can help you step back, take a deep breath, and leave all the media hype behind for a moment.
When the markets are falling, I know that it’s hard to focus on what your financial advisor is doing on your behalf. It’s difficult to recall your advisor’s discussion of the maximum loss any particular strategy or combination of strategies went through in the past. It is almost impossible to remember that despite those declines in a strategy’s past history that you were told of, that you were still enthused with the end result of the portfolio over a full bull and bear market cycle.
If investors went through the two market crashes this decade with an advisor that simply allocated their portfolio to a handful of asset classes to diversify away the risk, they know that such an approach yields a portfolio that pretty well tracks the experience of the falling market indexes talked about in the media.
In the past you may have been told to just buy and hold – wait and it will come back. Today I would say to you to… buy and hold – but hold actively managed strategies where someone is watching over them and making the best decision possible given the lessons learned from market history.
For some strategies, that may mean holding on a bit longer to make sure the downturn isn’t a fake-out. For others, it may mean moving to cash. Still others might even start to move into funds that move in the opposite direction as the indexes (inverse funds).
Let’s now turn to perspective. At Friday’s close, the stock market (S&P 500 Index) was down just short of 4.5% from its all-time highs set a month ago (5/21). It is down 2.35% for the month of June. That’s the half empty argument.
On the other hand, the half-filled approach – the stock market remains up over 10% for the year and is still up since the end of last quarter and even the end of April. Of the thirty country ETFs most actively traded, the US S&P 500 ETF (SPY) is the least oversold since the May 21 market top and has advanced YTD more than 28 of them.
Source: Bespoke
The Fed pronouncements, the Chinese slowdown, the riots in Turkey, Egypt and Brazil and the upcoming earnings season, which is forecast to be weaker than last quarter – all these things are worrisome, and may turn the current minor pullback in stocks into something more. It’s just there has not been enough technical damage to the indicators to clearly demonstrate that it is going to be one or the other yet.
Remember, the biggest mistake made in the markets this year by professional and non-professional investors alike has been not being fully invested in stocks during the current market rally. So far on the run up it has always paid to be cautious in pushing the sell button. This time may be different, but to determine that precisely we have the various actively managed strategies. As each of them pushes the sell button, we will move, but you cannot anticipate the alarm going off.
Last week at a meeting, one of those in attendance complained that they had just missed a target by one point, and asked for a special exemption. The VP could be heard saying, “It takes 30 to qualify, you got 29.29 – not 30!” So a pullback is not a correction, and a correction is not a bear market, and a bear market may not even be a crash, until it is. And in managing strategic portfolios, you can’t anticipate the sell signal (or next time around, the buy signal); you have to wait for it to occur.
At the same time, I have been advising selling bond funds in all but the most actively managed strategies all year. In that time the popular TIPS ETF (inflation protected government bonds) is down over 15%. In addition, here’s a chart this quarter of the popular Vanguard Total Bond Market Index Fund.
Source: Yahoo! Finance
I don’t like interest rates rocketing up to 2.6% on the government’s 10-year bond, but put it in perspective – interest rates are still lower than they were two summers ago when they cut the rating on US Treasury bonds during the debt crisis!
Source: Bespoke
Perspective is a funny concept. Most of the time we need to be very aware of what is immediate, that which is towering right in front of us; other times taking the longer term view gives us the best strategic advantage. For example, it might be clear and quiet here on the railroad track, but if that’s a train coming at us in the distance…
All the best,
Jerry
© Flexible Plan Investments
