In my video today, I ask the question “is it time to run for the hills, or jump off the ledge?” because of the recent increased volatility and decline in the markets.
Let me give you the short answer: no.
The bond correction was an over reaction, and the most recent equity dip is not a precursor to some big decline. At least not in my opinion.
For a full discussion of this, listen to my short video where I expand on these ideas.
Hi there, it’s Mike! Friends, Mike Brady here with Generosity Wealth Management – a comprehensive full service wealth management firm right here in Boulder, Colorado and today’s conversation is about whether we ought to run for the hills, find that ledge, and jump off it, because if you’ve been watching or reading in the news recently the volatility has gone up in the unmanaged stock market indexes and some of the bond markets as well.
They’ve decreased and the answer is no, I don’t believe that we should jump off that ledge and I think this is a short term correction to what we’ve seen. Let’s talk about the unmanaged stock market indexes first and foremost; your S&Ps, your DOWs, your NASDAQ, etc. I’m going to put a chart up there on the screen and if you have been watching my videos for a long time, you’re very familiar with this chart.
It is normal for there to be intra-year decline throughout the year, going back years and years and years. Every year there is one and every time there is one, we always freak out and forget that that’s a normal thing. I think this is going to be one more of those normal things, not the beginning of some huge decline where we lose 20%, 30%, or 40%. I just don’t see that with all of my analysis.
I also think that it’s going to be relatively short lived as well. Let’s talk about the bond market. The yields have spiked up in relation to the bond prices going down. Back in June, Ben Bernanke was the chairman of the Federal Reserve. He made some comments about starting to taper off. Now of course, he’s taken all summer to kind of back off some of those comments, but essentially let’s think about money in the economy as money in a bowl.
Here, kind of look at my hands there. Money in a bowl. You could put money into it; you can take money out of it. For the last four or five years, we have definitely been putting money in there by decreasing the interest rates, but also doing a bond repurchase. What he said back in June was not that we were going to start taking money out of it, but if we’re stop one of these two levers of putting money in – the bond repurpose.
You just said we’re going to put in – we’re going to buy left backs or we’re going to put less money in. Also, there’s an accumulated amount of sums and money in there already. I think that the concern isn’t overreaction and it took us a long time to fill this bucket with a lot of money. It’s going to take a long time for that impact to really be felt. At this point, there’s money in there for banks to lend out and they are definitely doing that at this point.
I think that the reaction even on the bond market, is an overreaction and I’m not freaked out about that as well. It is important to have a portfolio that has both stock and bond components in general, being very general, each client is different of course. The percentage that you have in those two of course is specific to what you’re trying to do with your particular strategy, whether that’s your retirement strategy or growth strategy and income strategy, etc.
The mix between these two, some things zig when the others zag. At this point, the equity markets in general have that. All of the bond markets in general have been down so they’re going to compete in force this year. In previous years, it’s been reversed where the bonds have done well and maybe sometimes the stocks at various points have gone down, so having that mix makes a lot of sense.
I’m going to end this video with something that I really like from Warren Buffet. Back in 1975, he wrote a letter to Katharine Graham who owned the Washington Post and he basically told her to keep the long view, the long picture in mind. Think of it as he wrote in the letter of a thousand coin tosses and there are going to be times when five or 10 of those are going to be in a row all head or all tails.
You might see it all-sided one way or the other, but it really is just a short time frame that does go back down to normalization. It’s the same way when we’re looking at investments. We’re here for the long term. We shouldn’t get too excited if there’s a month or a quarter or even a year that’s off. They do have a tendency to go up and down in value.
The reason why we have investments, of course, is that we assume that the future value will be greater than today. Whether that future value is five years, 10 years, 20 years – whatever it might be. Otherwise, why would we have investments? Why would you put it in there? You’d put in your master of storing in the bank savings account.
It’s important to take that into consideration that there are times both five to 10 coin tosses as Warren Buffet says, but we’re really kind of looking at it as we’re building this portfolio up together that works for us with our particular risk tolerance level and what you’re really trying to achieve. You’ve heard me, ad nauseum, talk about how important the strategy and the retirement analysis and the plan is and that we then use managers and other investment vehicles in order to support that particular strategy.
Let’s keep our eye on that particular strategy.
Mike Brady, Generosity Wealth Management. There was an awful lot here in a short amount of time, but I like to make my videos short, and pithy, and to the point. Hopefully today I achieved that.
Mike Brady, 303-747-6455.
Have a great day!