As the South and the East Coast prepare for more pulverizing storms and snow, the West Coast is getting ready for El Nino. I like to say that Southern Californians are willing to pay the weather tax, which means that no matter how bad Mother Nature might turn out we enjoy blue skies and certainly, by comparison, warmer temperatures.
By any measure, so far the 2016 investment climate has been suffering from bad weather too. As of 1/22/16, “Some $8 trillion in stock market wealth has been erased” according to new data from Bank of America Merrill Lynch. The bank says the “Odds of a recession in 2016 have risen to 20% from 15%.” BofAML also cut its growth forecast for the US to 2.1% from 2.5%.
The worldwide stock market crash is now over four weeks old. Some of us believe that this is no longer a “correction” but that we are now in a bear market. If history repeats, it may be that we will see a much larger down market. How low could stocks go? Earnings season is now underway, and the market is hoping for a boost. “Earnings are expected to show the worst decline since the financial crisis, yet analysts are holding out hope that the bar is low, earnings will beat and will help pull the market out of its worst new year slump ever,” according to CNBC Market Insider on January 18, 2016.
According to me, the index to watch is the S&P 500. The closing number to watch for is 2100. When the S&P 500 closes around 2100 or above, that’s probably a good sign that the bull is in control. If the S&P 500 stays below 2100, that may be an indication that the down market bear is winning the wrestling match. The S&P 500 closed on January 27, 2016, at 1883, according to CNN Money. The year-to-date return (1/1/16-1/27/16) is -7.88%. Remember the old saying, “As January goes, so goes the year.”
Careful of the Kool-Aid: “Stocks for the long haul.”
When you don’t need the money, it may not matter if the account doubles or is reduced to pennies on the dollar. But when you do need the money, it’s a whole different story. When my team meets with local investors in their mid-70s who tell us that their life savings were valued at $2m, and we can see the account started 2015 at $1.4m, but ended the year at $1.0m, I am motivated to do all things possible to see how investors may be better prepared for the good, the bad, and the unforeseen.
One of the best things investors can do is evaluate the risks they are willing to accept. Consider reviewing your personal risk/reward ratio. If you find, for example, that you are accepting 70% greater risk for the reward of a .50% (that’s ½ of one percent) greater return, we suggest the odds are not in your favor. In fact, you may find you are taking on significant more risk for an insignificant greater return.
If the oil market continues to drop this year, the stock market may continue to follow. My second suggestion is don’t be complacent. Do take the time to look at other options. Identify options other than cash, bonds, residential real estate, and stocks. Do go back to see what, if anything could have been learned since 2000 when investors saw returns cut in half twice in the same decade.
Look for results where you can see in a bad year the losses were limited to -20% or less. A -20% market loss needs a gain of 25% to get back to even. After a -60% loss, however, the required return to get back to even is 150%. You are probably in the game after a minor loss. It’s after that major loss that my not only knock you out of the ring, the bad mood alone may disrupt your days for the rest of your life.
Super Bowl commercial highlights financial stress
Your broker is famous for saying, “Buy & hold.” Or “buy on the dips and hold through this adjustment.” If that works for you, fine. If it doesn’t, I am saying, Don’t be complacent. Look for active management strategies that may minimize your downside participation in bad markets. We brokers probably weren’t around in 1929 or 1968. If the tired and old statements that my peers offer you need to be retired, let me suggest that you get a fresh, second opinion.
According to the Wall Street Journal, on January 5, 2016, Super Bowl “advertisers are paying up to $5m for 30 second’s worth of ad time.” Apparently, “some 114.4 million viewers watched the New England Patriots defeat the Seattle Seahawks in Super Bowl XLIX, the largest audience for a U.S. television program ever.”
The bank’s commercial during the fourth quarter’s 2-minute warning, will “inspire millions of Americans to take control of their finances,” said Margaret Callihan, chairman, president, and chief executive of SunTrust South Florida. Callihan went on to say, “Our research continues to show that financial stress is a national epidemic and is suffocating Americans.” Most Americans take the time to buy cars, homes, and take vacations. Let’s say completing one of those tasks took you five hours. I encourage you to take that amount of time and focus on your finances. After all, if you don’t take the time who will do the job for you?
Need a second opinion? Make time to speak with John Grace today.
The opinions voiced in this article are for general information only. They are not intended to provide specific advice or recommendations for any individual and do not constitute an endorsement by NPC. To determine which investments may be appropriate for you, consult with your financial professional. Please remember that investment decisions should be based on an individual’s goals, time horizon, and tolerance for risk.
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