Stan's World: It's Prediction Time! Or Is It...Submitted by S. F. Ehrlich Associates, Inc. on January 3rd, 2017
January 3, 2017
Happy New Year! Best wishes for a healthy, happy, and prosperous 2017.
As the year drew to a close, we moved into the prediction silly season. In an often futile attempt to predict and outsmart the markets, print, on-line, and television media were filled with pundits predicting the markets will go up (or down); interest rates will rise (or fall); housing prices will climb (or drop); and on, and on. It’s an inevitable occurrence.
Thus, I think it’s only fitting that I make at least one prediction, a prediction I am confident has a 100% probability of occurrence. Unfortunately, I’m unable to tell you the date when it will occur, as my predictive powers are somewhat limited.
Don’t let the allure of a 20,000 Dow influence you. There will be a day that the stock markets will begin to fall, and the trend line will turn down. The markets won’t go down every day, but they’ll drop from whatever high they eventually reach. It may take awhile to realize it’s happening – one never knows when bull and bear markets start or end until long after they’re over – but you’ll see your portfolio drop in value almost every month. (Regretfully, my still limited predictive powers also can’t tell you how much the markets will fall.) So now that I’ve shared this breathtaking revelation, what can we do about it?
Frankly, we’re already doing two of the things that have proven to be effective at capturing upturns and limiting downturns: building diversified portfolios, and periodic rebalancing. Diversification mitigates risk1, and rebalancing helps you to buy low and sell high2. It’s the best that scientific research has to offer, even when we know bad news lies somewhere ahead. (As you’ve read in this space countless times over the years, research3 also teaches us that trying to time market ups and downs is a very futile exercise.)
Admittedly, what I’ve stated really isn’t a prediction, as economic cycles are part of all markets. The intent isn’t to alarm you, but to remind you that trees don’t grow to the sky. All rising markets eventually peak, stall, and turn down, and then the reverse eventually occurs.
Eight years after the last market downturn, you’re probably better positioned financially for the next one. While that might sound somewhat reassuring, I acknowledge that down is still down once the bear begins to growl.
If you’re retired and relying on your investments to partially fund your retirement, take some additional comfort in knowing that the dollars you require for the near term are invested in fixed income mutual funds that are less volatile than equities. Not only does that provide necessary cash flow, it also buys time during a downturn until the markets turn around. It’s also why we use a bucket strategy to try to protect you from upsetting the entire apple cart when markets turn scary: Bucket 1: cash; Bucket 2: short-term bond funds; Bucket 3: multi-sector bond funds; Bucket 4: equities. It’s not sexy, and explaining it will NOT make you the center of attention at neighborhood barbecues and cocktail parties.
Once the bear market hits, the good news is that each day puts you one day closer to its end. Not only don’t trees grow to the sky, but markets don’t fall to zero.
Sometime after the bear market ends, markets will rally and push toward new highs. As that bull market gets long in the tooth, it will be time for me to repeat this cautionary note and demonstrate once again my predictive powers.