The stock market has been on an upward streak for the past two years, and the Dow and S&P have returned to hitting all-time highs, despite the precarious outlook for equities laid out in this week's earlier report: The Stock Market's Shaky Foundation.
At the same time, unrest in an increasing number of markets around the world (Venezuela, the Ukraine, Turkey, Argentina, to name just a few) threatens contagion risk. And looking at the big picture, interest rates remain elevated from their 2012 lows and are likely to move higher, not lower, from here.
For these (and other) reasons, the current environment is extremely challenging for investors. The pick-a-sector-and-then-buy-and-hold strategy that has worked well for many of the past several decades is no longer prudent. Investing in today's markets requires more fundamental analysis at the individual company level, as well as a willingness to defensively build up "dry powder" reserves to deploy if indeed (as we expect) a major downward market correction brings assets prices down to much lower levels.
In this week's podcast, Chris talks with the team at New Harbor Financial about the current outlook for the market and what they think investors should be prioritizing:
Maintaining discipline and patience here, is very, very important whether you are a money manager or an individual investor. It is times like this that it is really truly the hardest thing to do—to sit out, to remain in cash to a large degree, to watch others brag about the easy gains that are being made—when the data set that you are looking at is telling you to be extremely cautious, as it has been telling us for some time. Human behavior never changes. We are seeing—amongst not just our clients but people that we talk to—we are seeing a lot of frustration. Not necessarily frustration with either how they are managing their money or how we are managing their money. They just feel frustrated that they cannot, in a safe way, take part in more of the gains that they perceive others are taking.
So you know, the sense is that everyone is partying except them, and that can be very mentally distracting. I think a lot of your listeners out there that are managing money for themselves are battling this.
So the prevailing sentiment out there for people that are in the stock market that have made good gains in the last year or so, even if it has been a risky environment that whole time, is that they can get out whenever they want to. And history has shown that it is often difficult to do that. If you look at the nature of the market, it went literally almost straight up last year. And we are seeing a little bit of a change in character early this year, a little more volatility. We had about a 6% drop about a month ago, a few weeks ago, January. We came right back to the highs. And it is the self-reinforcing behavior in the market that when people go in and buy dips, it keeps coming right back and that is—eventually when a bear market develops, that is what causes so much damage because people have been lulled into complacency and they think, "well, I have been buying each and every drop, I will just buy each and every drop all the way down," until, of course, they do not want to look at their statement to their accounts anymore and then a bottom forms some years later.
But right now in the community, we are seeing more pressure psychologically, really, than I think we have ever seen in our business. Certainly more so than in the 2007/2008 timeframe. So most of our job these days is essentially counseling people to remain patient and not get tempted into these risk markets. The job of this bull market is to shake every bear off and to suck every last bull in. And the data set just does not support that.
The discussion then continues, focusing on risk management strategies investors can consider such as raising cash, taking advantage of stable value funds (if your retirement plan offers them), taking short-term high-quality bond positions, deploying options such as covered calls and puts (but be sure to do so under the direction of your a professional financial adviser if you don't have prior experience with options), and others.
But perhaps even more important, the New Harbor team advises investing in grounding yourself emotionally. Focus on the data and don't let emotion cloud your decision-making. Decide on a plan that makes rational sense to you, and stay disciplined in carrying it out over time - no matter what temptations or taunts the market, or your neighbors, may serve up in the short term.
If after listening to this podcast, you find yourself interested in connecting with Mike, John, and the rest of their team to learn more about their advisory services, please use the form here to do so.
Transparency note: As a result of our public endorsement, Peak Prosperity has a commercial relationship with this firm. The details of this relationship are clearly presented in writing during the referral process -- but the punchline is, our relationship does NOT result in any increased fees to those who become clients.
cheers,
Adam
It should go without saying: this discussion should not be construed as individual financial advice by those listening to it. The content should be taken as informational and educational in nature only. Investment advice must be tailored to your specific personal situation (which Chris and his guests are obviously unaware of) and should be obtained directly from a financial adviser you trust. Before acting on any of the statements made in this podcast, we advise you do just that.
Click the play button below to listen to Chris' interview with New Harbor Financial (30m:14s):
This is a companion discussion topic for the original entry at https://peakprosperity.com/new-harbor-how-to-invest-when-the-bull-is-shaking-out-all-the-bears/