Here we are again; that feeling you get when you're at a crossroad with the stock market, your investments, and a feeling of regret that you didn't take steps to lower your portfolio risk even though you knew better - because you just know this bull market has been too good for too long. "WHY THE HELL DIDN'T I LOCK IN MY PROFITS?!"

 

I mean, you promised yourself during last February's stock market plunge that the next time your accounts recover, you're O.U T. With the major averages hitting new all-time highs barely over a week ago, did you follow through on your promise from eight months ago to lighten up on stocks? Hey, I'm not chastising anyone. The fact is, stocks are barely off their all-time highs, so you still have time to decide if you need to cut back on your stock allocation; rebalance your investments according to an appropriate mix of stocks, bonds, and cash based on your risk tolerance, goals, and time horizon.

 

It's a good time to bring this up because just like last February, when long term interest rates rose quickly, pushing the 10 year Treasury yield above 3.0% on a whiff of inflation due to strong economic growth, it's now happening again. But back then, long term rates quickly retreated below the 3% level for the 10 year, allowing stocks to return to their record setting ways. Unlike last February, this time the rise in long term interest rates looks a lot stickier. Reinforcing that is the fact that the U.S. unemployment rate just touched its lowest level since 1969. And by all counts, the U.S. economy is "ripping", as described by Marc Benioff, the CEO of cloud-king Salesforce.com. Federal Reserve Chairman Jerome Powell has also been sounding off on his optimistic view of the U.S. economy, as evidenced by the 4 expected federal funds rate hikes over the next year. All this, combined with a deepening trade war with China, suddenly has the bull market on its back foot, as evidenced by the fact that more stocks are reaching 52 week lows than 52 week highs - an undeniable sign of poor market breadth. The reasons to believe we just entered the beginning of a correction are very compelling.

 

What's an investor to do? Well, now that I scared you half to death, there is something you need to know. None of this matters much if you're more than 10 years away from retirement. In fact, a down market is the greatest asset for someone with a long term time horizon. Just imagine all of those future 401(k) contributions buying up a greater amount of mutual fund shares every month so that in a decade or longer, you'll be the proud owner of a much bigger retirement account thanks to all of those years of compounding returns. Even if you are closer to retirement or in retirement, that doesn't mean you shouldn't be exposed to at least some allocation of stocks as a hedge against inflation.  

 

The title of this post, "I just advised a client to sell everything in his account" is true. Makes me sound pessimistic about stocks, doesn't it? But what it doesn't tell you is that the account I was talking about is my client's 529 plan for the benefit of his child, who is only a few years away from attending college. Between the current 529 account value and my client's earnings, he and his wife have ample ability to pay for their child's college education. Our conversation went something like me asking him if he makes another 20% or 30% on the account over the next year or two, which is ridiculously aggressive in such a short timeframe, would it change where their son attends college? "No". If you lose 20% or 30% between now and the next year or two, how would you feel? "I wouldn't want that". Hence, preservation of capital was the most appropriate choice for this particular client's account objective, which meant all account holdings needed to be sold and reinvested into a money market fund. Note that this has nothing to do with their other accounts. 

 

Keep these in mind when you're reading the scary market headlines this weekend:

1. Your time horizon is the first thing you should consider when determining which, if any, adjustments you may need to make with your investments.
2. Just because something is best for one saver/investor, it doesn't mean it's good for you.
3. A talking head on TV offering a compelling point of view is not a strategy that's right for you. It's just a random point of view apropos of nothing except for the tenor of the moment.
4. Everything that feeds into our senses passes through a three-layer filter of bias, context, and nuance. And everyone's biases, context, and nuances are different, which is why general advice, rules-of-thumb, back-of-envelope analysis, and catchy headlines are not personal advice.
5. The only things that matter is what makes sense for your situation, which is what puts the the "personal" in personal finance.

Now read: The hardest retirement question to answer isn't about how much money you will need 

If you're looking for a better way to save, invest, and plan for your retirement, click on the "Let's Talk" picture below to schedule a 15 minute phone call with me.