Moderate Your Market Expectations

My colleague, Jared Kizer, who serves as chief investment officer for The BAM Alliance, recently examined the performance of the S&P 500 Index from March 2009 (the bear market ended on March 9, 2009) through October 2018, a period ending shortly before a spate of market volatility in December that saw the index record some dramatic declines.

Using a common statistical analysis referred to as “bootstrapping,” he shows how “otherworldly” the returns to that asset class were over the past decade. Importantly, he also shows that other “alternative universes” > SEE MORE

No Safety Flags In Investing


In case the latest bout of stock market volatility, which we explored earlier in a pair of articles about putting market moves in perspective and the danger of market myopia, is tempting you to sell now and wait for safer times, remember that to benefit from market timing you have to be right twice, not once. I hope the following explanation helps you to decide on the right strategy.

If you go to the beach to ride the waves and you want to know if it’s safe, you simply look to the lifeguard stand. If the flag is green, it’s safe. If it’s red, the ride might be fun, but it’s also too dangerous to take a chance. For many investors today, the market looks too dangerous. So, they don’t want to buy, or they decide to sell.

Here’s the problem. While the surfer can wait a day or two for the ocean to calm down, there is never a green flag that will let you know that it’s safe to invest. You might think that is the case (as many investors did in > SEE MORE

Investing Uncomfortably


In an earlier post, I explored some historical data and relevant research in an attempt to help investors put recent stock market volatility into perspective. It’s easy to lose sight of the facts amid the stress and anxiety caused by potentially large dips in your portfolio’s value.

Because it’s human nature to seek to avoid pain, the pain of bear markets and underperformance unfortunately tend to cause investors to consider changing strategy. It’s an all-too-human trait to want to believe that someone out there can protect us from bad things happening to our portfolio—despite the fact that the evidence shows no such person exists. However, before choosing a new strategy, you should be sure there is evidence to support your belief in why it will be more likely to help you achieve your goals. Consider the following evidence on three common > SEE MORE

Bad News In Perspective


The holiday season is supposed to be about good cheer. Given the economic news, you might think investors would have plenty to be cheerful about. For example:

  • Economic growth is strong. The Federal Reserve Bank of Philadelphia’s Fourth Quarter 2018 Survey of Professional Forecasters projects real GDP growth of 2.7% for 2019, down just slightly from the forecast of 2.9% for 2018.
  • Unemployment is at 3.7%, the lowest rate in 50 years.
  • Inflation is moderate. The Philadelphia Fed’s latest 2019 forecast is for an increase of 2.3% in the Consumer Price Index (CPI), down slightly from its forecast of 2.4% for 2018.
  • Consumer sentiment (a leading indicator) is strong. The final December University of Michigan Consumer Sentiment Surveycame in at 98.3, remaining near the highest levels we have seen over the past 18 years (despite the recent weakness in stocks). The last time the Consumer Sentiment Index was consistently above 90.0 for at least as long was 1997 through 2000, when it recorded a four-year average of 105.3.
  • The November ISM (Institute of Supply Management) Non-Manufacturing Purchasing Managers’ Index came in at 60.7%, 0.4 percentage point higher than the October reading of 60.3%—representing continued growth in the nonmanufacturing sector and at a slightly faster rate. The six-month moving average of the index is at about its highest level in more than 20 years. The Non-Manufacturing Business Activity Indexincreased to 65.2% in November, 2.7 percentage points higher than the October reading of 62.5%, reflecting growth for the 112th-consecutive month, at a faster rate.

The bottom line is nothing in the economic data indicates we are headed > SEE MORE

Why Chasing Yield Fails


To help prevent the next Great Depression, in 2008, the Federal Reserve increased the “price” of avoiding risk.

Fearful investors seek the safety of Treasury bonds (as well as government agency bonds and FDIC-insured CDs). When they do so, they forgo the risk premiums available from non-Treasury debt and equity investments. Driving the rates on Treasury bills to virtually zero led many investors who rely on a “cash flow approach” to investing to frantically search for higher yields.

Higher bond yields can be achieved in two ways. The first is to take incremental maturity risk, which would increase the volatility of the portfolio and subject you to increased risk of unexpected inflation. The second is to take incremental credit risk.