Historically, the best protection against a bubble or elevated valuations in a single asset class is to have exposure to other asset classes and strategies that do not have the same underlying fundamental drivers. This is ultimately an exercise in humility and risk management. Diversification, at its core, is an admission that you cannot predict the future and is employed to protect oneself from the many possible outcomes that lie ahead.
Knowing what you own and why you own it may be the most important rule, but it’s just the beginning of the investing journey, not the end. Once you understand the “what” and “why” the hard work begins.
When secular trends reverse, no bell is rung, and no one can believe that a shift has actually occurred.
But as narratives follow prices, the longer they are sustained, the more the story changes and the more people believe it. In January, there were few believers in a change to the status quo. Today, as the great reversals have continued, there are more believers.
Spreading your money across a wide range of investments, asset classes, and geographies is the ultimate form of saying, “I have no idea what’s going to happen in the future.”
For those of us who cannot predict the future, we diversify.
If the year ended today, it would be the worst ever for Aggregate Bonds, slightly edging out 1994. Interest rates are rising and there is little cushion from the coupon to soften the blow. For those that equate bonds with safety, this can be a tough pill to swallow. But bearing that risk is the price of admission for long-term bond investors.
Interest rate levels, in and of themselves, aren’t the sole cause of every market movement. They are just one factor among many that impact how people allocate their assets.
And maybe, just maybe, they don’t matter as much as we all think.
An objective observer will note that the risk/reward in U.S. equities is less favorable today than it has been in quite some time. That says nothing about what will happen tomorrow, but if the price one pays for something still matters, it will be a factor weighing on returns for years to come.
The problem with the current rate environment is we’ve never experienced interest rates this low before. Maybe investors will become spooked at lower rates than they have in the past. Maybe markets will be given the benefit of the doubt if the economy is chugging along. The truth is there is no rule of thumb with these things. But rising rates, in and of themselves, don’t always spell doom for the stock market.
Looking through 93 years of returns for stocks, bonds, and cash won’t help you predict future returns for these asset classes. But it can give you a better sense of the risk involved in these asset classes since risk is much easier to predict than returns.
It's always hard to see things changing. And then along comes a year like 2020. Nobody had any of this on their list at the end of 2019. 2021 is sure to deliver some surprises, and unlike the last dreadful year, hopefully, they're for the better.
2020 may look easy with the benefit of hindsight, but it most certainly was not for those of us who lived through it. If you survived 2020 as an investor without making an avoidable or unnecessary mistake, you outperformed this year.
2020 looks like it could go down in history as the worst intra-year drawdown that finished the year with a positive return. And the fact that those gains are now in double-digit territory is not something many (any?) people saw coming. The S&P 500 Index is now up well over 60% since bottoming in late-March.
Although the 2020 stock market is something of an outlier, it’s not out of the ordinary for stocks to see gains on the year despite large losses on the way to those gains.
Timing the market is hard for a plethora of reasons. Markets are right more often than people give them credit for. The direction of the stock market is impossible to predict in the short term. And, even if you get lucky by getting out at the right time, you still have to get back in at some point. Market timing requires being right more than once.
The stock market has been all over the map this year. And, while 2020 is an outlier in terms of the wild ups and downs, volatility is something every investor is going to have to get used to in the coming years. You simply have to be willing to accept some form of volatility if you would like to earn anything on your capital.Volatility has always been part of the markets, but more so now than at any other time in history because interest rates are on the floor.
There are simply too many unknowns and outside factors that can impact the economy, markets, sectors, and companies to ever give yourself permission to have complete certainty about the future.
Sure, strong opinions are fine, but they better be weakly held because the markets are a humbling place if you’re not willing to look at both sides of an argument.
If you’re not a short-term trader, then you’ll see that all-time highs are nothing to fear. Returns are actually higher 6, 12, and 24 months out. This isn’t a shocking revelation. Rising prices attracts buyers, it’s that simple. All-time highs are not an all-clear signal, no such thing exists. But neither are they a sign that the rug is about to be pulled.
There are no easy answers when it comes to finding income in your portfolio these days. While it would be nice if retirees had the option of stashing their cash in a money market earning 5%, we have to invest in the markets as they are, not as we desire them to be. So today you pays your money and you takes your choice.
2020 is teaching investors a lesson that should be apparent to all of us who watch the market closely: it is full of surprises. The best way to plan for surprises is to be ready for a wide range of outcomes.
Everything is working.
Whether you’re an equity investor, hiding out in bonds, or waiting for the dollar to collapse, you’re making money.
The permanent portfolio, which is an equal-weighting of everything from stocks to bonds, gold, and cash, just had its best run in 40 years!
Rates are low for a reason. “Safe” bond yields at these levels are bound to have unintended consequences. Here are some thoughts on what this means for investors:
1. Savers shouldn’t expect much.
2. Borrowers are getting help.
3. Investible assets have to go somewhere.
4. Historical valuation tools will be harder to use.
5. Mini booms and busts may be here to stay.
“It depends” isn’t the advice most people want to hear when it comes to their finances or career or really any big life decision, but the world is rarely black or white when it comes to decision making under uncertainty.
2020 is unprecedented for the number of times people have called it unprecedented. This year certainly is unique. But stock market volatility is not.
The reasons change but big moves in the stock market are nothing new.
If you lived under a rock in 2020 and didn’t pay attention to what was going on around you, simply looking at the performance number of the overall market would make you think things have been relatively boring this year.
There have been two massive moves in the stock market this year (and this year is still not even halfway over). Once you start digging into the historical numbers, you begin to realize the stock market is even crazier than advertised. Surprisingly, huge up and down moves happening in the same year is not that out of the ordinary.
You have to account for luck in the investment process. No one can prepare for good luck, but there are ways to manage bad luck. Diversification is one of the best tools available to avoid allowing bad luck to give you extreme outcomes at the worst times.
Fundamentals are more complex than they seem. One of the simplest, yet most overlooked, stock market fundamentals is the dividend yield. Dividends also happen to be one of the most resilient features of the stock market over the long-term.
The stock market is in the midst of a correction. Things look bleak and could certainly get worse. But, the stock market will recover eventually. I’m far more worried about the bond market right now than the stock market.
A decline early in your retirement can have a big impact on the value of your nest egg. You’d have to draw down a larger portion of your portfolio to meet your income needs, while a decline that occurs later might be less hazardous to your wealth.
A picture is worth a thousand words. In each issue, we present one insight on a range of market, investment strategy, and behavioral topics. The 1000 Words Series is designed to provoke insightful and memorable conversations.
Investing may be simple, but it isn’t easy. We’re told to buy equities and hold them through good markets and bad. But few of us have the fortitude to calmly stay fully invested when prices are declining. When it comes to investing, your best offense is a great defense.
This guide strives to help you achieve better long-term financial outcomes. Its main message is that doing so is more about setting the right goals and controlling your own behavior than it is “beating the market.” We provide plenty of historical perspective on markets, but only in the service of confronting our natural tendencies to make poor decisions about money.
Recent financial innovations have created both a wealth of opportunity and an avalanche of complexity for investors. It has never been easier—or more overwhelming—to take investment risk. With complexity comes the need for simplification. How do investors cut through the noise and take control of their portfolios? This guide offers perspective on the so-called active and passive investing debate, with an eye toward prioritizing diversification, risk management, and investor behavior.
There are four steps to calculating your "retirement number" - the number of dollars you most probably need as a sum of capital from which to draw a lifestyle-sustaining income without serious danger of running through the capital.