Financial Markets: The decade gone by...
What to expect from the next one, and what it should mean to you as you evaluate a comprehensive plan to build wealth for the future.
“Financial markets are vital to the smooth operation of capitalist economies” explains Will Kenton (Investopedia).
Some may argue that a decade ends on the 1 and starts on the 0. Personally, I like the idea of starting on 0 and ending on 9. It makes it easier on my eyes and makes sense in my head.
So, being that we are at the start of a new decade, let’s look back and see what has transpired and try to make sense of what may happen in the years to come.
At the beginning of the last decade, we were a couple of years into the road to recovery for the financial markets after experiencing the biggest financial recession our generation has ever seen. Smart money was aware that our Government had stepped in ‘big time’ to save the banks and some big American iconic institutions. The Federal Reserve had also reduced interest rates to its lowest levels and were on a continued course of quantitative easing (QE). What followed was a rising market that, some may say, was caused by all the above-mentioned strategies that brought the economy back to life.
The middle of the decade saw a Greek bailout, global tensions ease, and our economy transition to something more traditionally sustainable which helped markets rise. Then the Tax Cuts and Jobs Act of 2017 helped fuel a continued bull market which was also propelled by corporate earnings.
At the end of 2019 we saw the stock market reach new highs amidst low unemployment numbers, decent consumer spending, and a band aid trade deal with China and a thriving US economy. The S&P is at an all-time high and sits above 3250. Geopolitical tensions still exist. We are still amid an ongoing trade war with China, in conflict with Iran, while transitioning into an election year. On top of that, concerns about North Korea’s nuclear ambitions, Russia’s meddling in everything, Brexit (to go or not to go) and rumblings of an expected recession in our own economy.
“Nobody has a good record predicting the U.S. economy, not pundits and certainly not stock investors. And while a recession has been incorrectly forecast practically every day of the current bull market, when one finally comes it’s going to hurt” states Sarah Ponczek.
Let’s look at where the Financial Markets may be going in this new decade. Take a look at history.
At the time of writing this article, the US has conducted a raid in Iraq that killed the head of Iran's elite Quds military force who was also one of the most powerful figures in the Islamic Republic. Iran vowed revenge. They responded by firing missiles at two US bases in Iraq.
While history has shown that the United States in conflict may affect our portfolios, it’s more of a knee jerk reaction, and markets recover quickly; market corrections occur when it’s felt that all the good news is already priced in, stocks reach a plateau, are overbought and looking for a pull back. The question is, if the market dips, would this be a time to reallocate and readjust portfolios and maybe add new money to participate in the next leg up? Iran-like incidents will occur from time to time and pressure will be put on the markets but the impact of stocks from geopolitical tensions has historically proven to be short-lived.
Knowing that markets will continue to be volatile, we must be vigilant for the next correction and adjust our portfolios accordingly. Keep in mind, we have a debt crisis in this country, inflation, having been subdued for an extended period, will eventually rise and if it goes too high, the economy tends to suffer.
Markets have historically risen over time. ‘Timing the market’ is an impossible feat. What is in our control is our ‘time in the market’. We need to be vigilant in the market. Think: your time horizon.
What is ‘time horizon’ or ‘investment horizon’? It is defined by a period an investor expects to hold an investment until they need the money back. A one- to two-year time horizon aka short-term time horizon would entail being invested in high yield savings accounts or CD’s, US treasury bonds, etc. As your time horizon increases to more than 3 years, creating a portfolio with a mix of stocks and bonds may be a good idea. The greater the time horizon, the higher your percentage holdings of stocks versus bonds will be. In other words, your portfolio would probably move from being conservative to moderate conservative to aggressive as time horizon increases. (Your Financial Advisor should be able to help you with a diversified portfolio).
Let’s look at the reasons people invest money and what it means for the growth of their assets.
- Many would say they invest ‘to keep up with inflation’. To do that we need to know what the inflation rate has been and currently is. As you read this you have probably opened another browser and Bing-ed ‘inflation rate today.’ Softly put, if you have not been tracking the inflation rate, that’s not a reason you are invested.
- I also hear, “I invest to grow my wealth and someday retire with more dollars than I have today.” Of course, we want more than we have today, and the financial markets present itself as a lucrative option, but this does not come without risk.
- Another reason, “Invest for what I ‘need’ in the future.” The issue is, we often do not know what we need in the future unless we can accurately predict the cost of living, inflation, health needs, interest rates, etc.
We should look at the ‘WHY’ when we invest. That will tell us ‘where’ to invest and how much risk we should take with some or all our wealth.
In my opinion, most people invest in the stock market mainly for 2 reasons: First, it’s a big industry we want to be a part of (and many are – think retirement plans) and second, to grow their money.
My take - One way to position assets (liquid net worth) is to place them in 3 boxes by age of retirement (creation and strategy around assets in these boxes starts way before retirement) and assets that are divided amongst them in proportions. Financial markets are one way of creating one box of wealth, provided the other 2 boxes exist. What are the other 2 boxes? Think guaranteed income and tax-free assets with the ability to lower the tax rate and tax exposure in retirement. Many times, these other 2 boxes are nonexistent in our portfolios and most of our wealth is placed in a single box.
In closing, there are many outside forces that affect a market. No one can know for sure what direction it will move at any point of time, but one can anticipate that in the long term, it will rise. All we can do is position our investment box strategically with diversification and occasional reallocation. We may benefit from expert help investing in the markets, even if it’s only to take an investor’s emotion out of investing. As our last day of work approaches, we do not want to be ‘timed out’ by the market knowing full well that time is not in our favor to participate in an inevitable market recovery. We want to earn from our accumulated wealth in retirement and draw on that wealth in the most tax efficient way.
Ken Menezes is a Registered Representative and Financial Advisor of Park Avenue Securities LLC (PAS). Securities products and advisory services offered through PAS, member FINRA, SIPC. Financial Representative of The Guardian Life Insurance Company of America® (Guardian), New York, NY. PAS is a wholly-owned subsidiary of Guardian. Certified Financial Services LLC is not an affiliate or subsidiary of PAS or Guardian. OSJ: 52 Forest Ave., Paramus, NJ 07652, 201-843-7700 2020-93225 Exp. 1/22
S&P 500 Index is a market index generally considered representative of the stock market as a whole. The index focuses on the large-cap segment of the U.S. equities market. Indices are unmanaged and one cannot invest directly in an index. Past performance is not a guarantee of future results.