Scary Headlines and Investing Basics

Written by Rob Copeland | 02 August 2024

There's a lot of uncertainty in the market right now, about everything from whether the Fed waited too long to cut interest rates to whether there will be a major war in the Middle East to who will win the upcoming presidential election.

In an environment like this, it's easy for investors to get caught up in trying to figure out how to avoid all of the risks and capture all of the opportunities. I recommend that you step back and look at the big picture. Remind yourself of the reasons you're investing and the long-term returns you need from your portfolio to retire well or achieve other big financial goals.

There are definitely enough headlines to distract you from the big picture right now. New data show that the U.S. job market has slowed significantly, and that puts pressure on the Federal Reserve to cut rates sooner and more aggressively than it had planned to. Rate cuts are like catnip for the market; they can send stocks soaring. But if the Fed waited too long, as many fear, a recession could be in the cards, making stock gains harder to achieve.

Meanwhile, the U.S. government is warning that Israel's war with Hamas could escalate into a broader Middle East war following the assassination of a Hamas leader in Iran. A war between Israel and Iran could significantly disrupt oil supplies and hurt the global economy.

And of course the presidential election campaign cycle has been a dramatic spectacle, including President Biden's disastrous debate performance in June, the assassination attempt on former President Trump and the Democrats' change from Biden to Kamala Harris as their candidate. That race, which was leaning toward Trump, now looks very tight. While the market might rise or fall in the short term based on the election results, history has shown that over time stocks are more correlated with economic performance than which party controls Washington, D.C.

When you're investing for retirement, you definitely don't want to take on too much risk. Unnecessary losses can be difficult to recover from, especially if you're near or in retirement and are taking withdrawals. But it's equally dangerous to invest too conservatively. Playing it too safe is a trap that it's easy to fall into when you're in an environment like today's. Your principal needs to grow robustly in order to outpace inflation and grow your nest egg to the point where it can be your main income source throughout retirement. Loading up on safe investments like Treasury bonds or utility stocks won't do it. Worse still is to be out of the market altogether.

It's a good idea to keep an eye on the major market indexes like the S&P 500, which is up about 90% over the past five years. If the stock portion of your portfolio is lagging the market significantly, you may be investing too conservatively. Of course, investing a portion of your principal in safer investments can be a good idea as long as that allocation is appropriate to your age, goals and investing timeline.

An experienced, qualified advisor can help you determine exactly how aggressively you should invest in order to achieve your goals. Just as importantly, they can help you maintain a long-term outlook and avoid getting too conservative or too aggressive in response to temporary events. If you'd like to review your investments, please don't hesitate to reach out to us.

Here’s the Real Lesson of Dow 40,000  

Written by Rob Copeland | 29 May 2024

In mid-May, the Dow Jones Industrial Average touched 40,000 for the first time in the index's 139-year history. And even though the Dow has since declined a bit, crossing a big round number always seems to lift investors' spirits.

More importantly, the blue-chip index's new record was a validation for investors who had kept their nerve and stayed in the market through the past few years. Think about how many market gurus were warning of recession and a bear market. As they always have, investors who are patient and who ignore scary headlines as well as euphoric ones tend to see gains in their portfolios over the long run.

And that's exactly why investors shouldn't be discouraged if the Dow and the stock market in general follow an up-and-down path for at least the next few months. It's very possible that the Dow specifically could move up and down in a range, fluctuating between, let's say, 38,000 and 40,000 without breaking out significantly above or below these levels.

The reason is that there's a lot of uncertainty now, specifically around inflation, interest rates and even the upcoming presidential election. But there's a good reason to stay invested in the market: A new bull market could start at any time. If you're on the sidelines when it begins, you could miss out on significant gains.

The 1982 bull market, for example, began after a stagnant period in the 1970s. And the 2009 bull market followed a sluggish phase after the 2008 financial crisis. Many investors missed significant portions of those rallies because they thought it wiser to stay out of the market until it was clear that sustainable gains were occurring. But correctly guessing the right times to jump in and out of the market is something that even professional investors fail at.

For instance, in 2023, 60% of all active large-cap U.S. equity funds underperformed the S&P 500 (https://www.spglobal.com/spdji/en/spiva/article/spiva-us/). The reason: Rather than just holding on to stocks, they tried to outsmart the market by buying and selling at opportune times.

Yes it can be hard to stay the course when your portfolio is stagnant or falling in the short term. But buying into the market and staying invested really does work to your advantage over time. If you had bought an S&P 500 ETF at the market high that preceded the Covid crash of 2020, you'd still be up 57% today. The gains that investors make in stocks is critical in preserving or even growing the spending power of their money over time.

Yes, there's risk in owning stocks, but it's a tradeoff for the potential of long-term reward. In the stock market, time is your friend.

What “Higher for Longer” Interest Rates Could Mean for Your Investments

Written by Rob Copeland | 29 April 2024

In case you haven't noticed, the stock market has been bumpy for the past couple of weeks, with the S&P 500 index recently down about 2% from its April 11 level. Investors are in a pessimistic mood and it's largely because the deep interest-rate cuts that the market expected early in the year just aren't materializing.

If interest rates stay high, there will still be opportunities to make money in the stock market—but investors would need to evaluate their holdings and potentially make some changes.

Here's how we got here. The Federal Reserve started raising rates in in March of 2022 as it became clear that high inflation was a problem that wasn't going to solve itself. By July of 2023 short-term interest rates had gone from close to 0% to over 5%. But while inflation has slowed, it rate of consumer price increases remains at 3.5%, higher than the Fed's 2% inflation target.

Now the market's interest-rate expectations have changed: Instead of the six quarter-point rate cuts this year, the consensus is three or even less. My opinion is that there's a 60% chance we don't see any rate cuts from the Fed this year.

If that's the way things play out, here are a few things to watch for. First, I think the housing market would continue to be in a funk. The average interest rate on a 30-year mortgage is 7.5%, the highest level in two decades. That's hitting demand for buyers of existing and new homes, which is weighing on companies that provide housing materials. When interest rates are high, that's generally a sector of the market to avoid, and it's part of why the economy in general could struggle in the next few months.

Another sector that is likely to be hit hard by a higher-for-longer environment is small-cap stocks. Smaller companies need to borrow capital to grow, and higher costs of capital push their profitability lower. Meanwhile, elevated inflation usually hits consumer-discretionary industries. Americans could rein in their vacation travel, for instance, hurting companies in related businesses.

Meanwhile, I'd be very careful and selective with corporate bonds in a high-rate environment. There are a lot of debt-laden companies out there, and with higher rates, the risk of default is greater than I think the market appreciates.

Where would opportunities be found in a continuing high-rate environment? A good place to look is companies that have low levels of debt, that are increasing their sales and that have the cash to purchase distressed companies. Some of the biggest and best-know technology companies have billions of dollars of cash available, and as small companies wrestle with high-interest debt, they can virtually pick and choose the ones they want to acquire.

As always, choosing the right mix of investments depends on your goals, your timeline and your comfort level with risk. Don't hesitate to get in touch with us if you'd like to discuss your investment portfolio.

Don’t Gamble With Your Retirement

Written by Rob Copeland | 25 March 2024

Looking for an investing shortcut that will change your life? You've got plenty of company. Especially when we hear about things like hot stocks or genius fund managers or soaring cryptocurrencies, it's easy to get frustrated with the seemingly slow progress of a sensible, diversified portfolio.

But if you're trying to achieve long-term goals like being able to retire at a reasonable age, over-aggressive investing is one of the biggest mistakes you can make. Yes, your investment portfolio might make a nice jump in the short term, but just like at a blackjack table in Las Vegas, big initial gains can blind us to the fact that big losses lie ahead. As Warren Buffett said, "The stock market is a device for transferring money from the impatient to the patient."

Successful investors invest based on the answers to three fundamental questions. None of those questions are "What's the hottest opportunity out there?" But the answers can form the basis of long-term financial success.

1. What are my investing goals? To be able to fund the important goals in your life, like retirement, education or financial freedom, you have to be able to define those goals and figure out their cost. Having that information allows you to determine how much you'll need to invest and the returns that you'll need to generate to meet your goals. And that's where time horizon comes in.

2. What is my time horizon? Time horizon refers to the length of time over which you plan to invest your money before needing to access it. The longer you have to invest, the better, because of the power of compounding. Compounding is when your returns earn returns, ultimately creating the snowball effect that prompted Einstein to call compounding "the eighth wonder of the world." The length of time your money has to compound is critical because it determines whether you'll be able to achieve your goals and how much risk you'll need to take to do so. Yes, it's true that you'll need to take risk to make money as an investor, but you should not take on more risk than you are comfortable with.

3. What is my risk tolerance? Risk tolerance refers to an investor's ability to withstand market fluctuations without panicking. Financial advisors help clients determine their risk tolerance by presenting hypothetical scenarios in which a portfolio declines. How much are you comfortable losing, on paper, during bad markets? It's important because panicky investors are tempted to pull their money out of the market at the worst time, locking in losses and sabotaging the likelihood of meeting their goals. The key to preventing that is to build a portfolio that, while still giving you the highest likelihood of a strong probability of achieving your goals, allows you to sleep at night in all market conditions.

It's critical not to approach investing as a get-rich-quick game. In almost all cases, the most successful investors are methodical, disciplined and patient. They ask the right questions and stay disciplined throughout the process. The opposite approach, cranking up the risk by chasing hot stocks or speculative stocks, can wind up seriously hampering your portfolio. It's a common reason why investors have had to push back their retirement dates, working several more years than they wanted to. And the older you are, the worse it is to have a gambler's mindset, because there's less time to recover losses.

As Nobel Prize-winning economist Paul Samuelson said: "Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas."