By Brad Thomason, CPA
I’d like for us to play the imagination game today. Let’s imagine a special kind of bank, one where you put money in at one hundred cents on the dollar, but when you take money out each dollar may be worth less than 100 pennies.
Would you be interested in depositing your money in such a bank?
Something very important happened in August of 2000. Do you remember? It was the highest monthly close that the S&P would have prior to the bursting of the Tech Bubble.
By the time this happened, the market had been going up for years. Not in a straight line, mind you. There had been sort of a dip-and-recovery that played out back in 1998. But at the trend level, it was a long running bull in anyone’s book.
And then it wasn’t.
The S&P 500 closed in August 2000 at around 1,500. The next time it would close at that level would be in May of 2007. Over six and a half years from point to point.
You don’t have to look very far into the materials we’ve put out over the years to see a central theme: the idea that retired persons should think twice about how much of their money they have invested in stocks and stock funds. That’s if they have any invested there at all.
This kind of event is a main reason why we take that position.
That crazy bank I asked you to imagine? That’s your brokerage account. If you had gone to that bank at any time between August 2000 and May 2007 to make a withdrawal, you would have essentially gotten dollars back that were worth less than one hundred cents each. Depending on the timing of the withdrawal, there would have been what was effectively a discount at work, which would have correlated to where in the decline/recovery cycle we were.
Had you taken your dollars back at the lowest point of that V-shaped stock chart, in September of 2002, you would have gotten back about 54 cents for every dollar you had put in. Had you been able to wait another couple of years past that, you would have gotten 73 cents. Which sounds comparatively a whole lot better. But to say it’s better belies the fact that it would still be awful.
Who would want to withdraw discounted dollars? Because of course since they are discounted, you would have to pull out even more to add up to the sum you needed, right? Yet, few people could avoid taking a withdrawal from their bank for nearly seven years.
Now, eventually the market climbed back to previous levels, just like the talking heads said it would. All was fine. Really it wasn’t fine for all of those people who’d had to pull out discounted dollars over the years – which by the way, didn’t participate in the recovery, since of course they were out of the bank at that point. But the fact that some people had permanent losses was glossed over, and the stocks-always-recover crowd said glibly, triumphantly, “We told you so.”
That’s how things stayed, too. For about five months. Then we entered the dip associated with the Financial Crisis. Fortunately that one resolved faster. It only took about five and half years.
So for those who were able to keep their money in for that whole nearly-thirteen year period, it worked out in the end. What proportion of retired people do you figure made up that group?
I don’t know the answer to that question. But I think you get my point.
The only people who avoided a pothole of that size either planned for it ahead of time, or weren’t taking out retirement money in the first place, because they were still working.
Food for thought. Thanks for playing the imagination game, today.
By Brad Thomason, CPA
The big question in the investing world at the moment is whether or not the US stock market has reached a top.
Let me give you some quick perspective on how the Pros are looking at this. Then we’ll talk about why that may not be all that important to you.
The Pros are looking at the recent past and doing some simple measurements to try to get some sense of what is going to happen next. Some say that these chart patterns simply don’t matter. Others point out that if even just a few people transact based on what they say – whether they should have or not – then the patterns become a sort of self-fulfilling prophecy which really does affect market behavior. As such, they are worth looking at.
If you look at a graph of the last 6 months, a couple of things will jump out at you right away. Back in late January we saw the prices go as high as they’ve ever been. On the Dow, about 26,600. Then, a couple of weeks later, in early February, we saw a pretty sharp drop down to around 23,800. Since then, the price has been bouncing around in between.
The Pros, in simplest terms, are looking at each of those points as lines in the sand; and they are waiting to see which line gets crossed first. If the prices can move away from the low, and keep climbing once they reach that line at 26,600, then the hope is they’ll keep going even higher. The Bull will still be running.
But if the prices rise for awhile, and then get turned back at the 26,600 line or somewhere south of there, then all eyes go to the other line at 23,800. If that one gets crossed, most will take that as a sign that the correction is beginning, and some pretty rapid selling could ensue.
Does this matter to you? It probably matters, but it may not be the set of measurements you should be paying attention to most. After all, are you more concerned with what happens in the market, or your own portfolio?
Portfolios need to be rebalanced periodically to keep them from becoming over-concentrated (and therefore, over-exposed to a given risk). Any time a portfolio component goes up a lot or down a lot, it creates an imbalance. The creation of such an imbalance is usually a good time to rebalance.
So rather than asking whether or not the market is at a top, perhaps it would be more applicable to ask how long it’s been since your last rebalance? And even more than that, what’s happened to your balances in the meantime?
Whether you think the market is going higher or not may be a secondary concern if your portfolio is already out of balance in the current moment.
If you are retired, this is an even more critical question. There are very few circumstances that I can think of in which it would be “best practice” for a retired person to have more than 25% of their holdings in stocks and stock funds. And basically none that I can think of in which they should have 50% or more.
So if you are retired, where’s your percentage right now?
If you’ve had any stock exposure at all the last two years then it is likely that part of your portfolio has grown more than the other parts. Which is nice, since it means you have more money. But it also probably means you are out of balance. Maybe way out of balance.
Point being, instead of worrying about where the market is, maybe it would be more productive to look at where your portfolio is. Your next action step is far more likely to come from that investigation than it is from trying to read the market’s tea leaves.
If rebalancing your portfolio is what you ought to do right now, whether the market goes higher or lower, then that would seem to make it the far important thing to focus on.
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