The Approaching Storm
In the last blog I spoke a bit about our amazing debt burden in 2021, and how the majority of Americans don't seem to consider it a very big deal. I think I can safely promise you that history books will one day consider it a very big deal. When the powers that be no longer are able to generate enough revenue through taxation, fees, fines, and sanctions to pay the interest on the debt, the issue of governmental debt will become the number one concern of Americans. I believe that it nearly happened in 2008.
Since then our economy has been in a very strange pattern. Slow growth in general has been mocked by Wall Street, with some fairly good returns being generated in the last five years. What many have not noticed is that these market returns have been closely linked with QE (quantitative easing), which is an abnormal infusion of printed money into the market. In other words, the market has responded well during the time that QE was going on, but now that the infusions have stopped, so has the market. Is this the sign of a healthy economy? I don't think so, but with great "irrational exuberance" (an expression made famous by Alan Greenspan), investors seem to rush in where others fear to tread. Greece is defaulting? Market drops. EU bails out Greece? Market rises. Indeed, neither of these events is good news, but investors are grasping for any sign of hope. The result is a stock market bubble, bid up to "irrational" highs far above the true value of the underlying businesses.
Like we used to say in the Navy, "stand by for heavy rolls!"
Where do we go from here?
All of the above is very interesting from a macro-societal point of view, but as a fiduciary, I must look at worst case scenarios. How does one protect his financial future in light of the above. Here are some suggestions:
- Don't be greedy
I can't tell you how many retirees I run across who are 75-90% exposed to the stock market. This is crazy. When I query them about this, they'll usually respond with something like, "where else can I get growth?" That could be true, but maybe at age 80 your income should take priority over growth. After all, if your income drops 50% you'll care more about that than if your investment portfolio does the same. Take a look at some safer income strategies than the "hope and pray" solution proposed by your stockbroker.
- Eliminate personal debt as much as possible
The sooner you can become debt free the sooner you can begin to live without financial worry.
- Determine how much risk you can live with, and then make sure you're investment decisions match that risk.
It has been my experience that most investors who use a stockbroker have no idea how much risk their portfolio is exposed to. For some reason, I have observed that most retirees will say that they are very conservative investors, while their stockbroker, on the other hand, must have misunderstood them because invariably these same folks are in moderate to high risk invsetments.
- Have an emergency fund
If you are still working you should have at least a 6 month emergency fund to take care of your expenses should hard times or an unexpected emergency arise.
- Keep some cash
I also don't think it's a bad idea to keep some cash on hand. During the height of the 2008 crisis, some lawmakers were telling their wives to "go the ATM machine and get as much cash as it will let you have." What did they know that most of us don't? If our electronic systems of delivering money suddenly stop working cash will be king. It can't hurt to keep some on hand.
- Do "Peace of Mind" investing.
Given that our market today is at an all-time high, which direction do you think it's more likely to go? Up, or down? If you passed second grade math, then you might come to the conclusion that down is a real possibility. Did you know that it's possible to make money in a falling stock market? Through tactical strategies, our managers are able to make money if the market goes up, but also to help protect you when it goes down. Do you have this kind of hands-on management in your portfolio?
As a Boy Scout, our motto was "Be Prepared." That's never been more true than today. Of course, I could be completely wrong about all of this. We may be able to borrow indefinitely to pay our debts. We may be able to tax our citizens up to 95% and everyone will be able to get all the free stuff the government decides to give (by the way, that's called Communism) them. Our stock market may continue to rise from now on. But when it comes to financial planning for my clients, I'm not betting on it.
Until next time,
Are you a serious investor? Like to keep up with what's happening on Wall Street. Take a look at our commentary on what's happening in the market. Delivered weekly to your in-box!