Checking In - First Post on the New Website - Hope You Enjoy!
It is late July and it's time to check in with a mid-year market review and a few thoughts on investing for the rest of the year. I have had the pleasure of attending several good conferences this spring and listening to the opinions of many in the industry. There are some prevailing concerns amongst financial advisors and they are not much different than any other year: is the market too high, should we be investing more now or waiting, what areas of the market should we be focusing on, is the economy really "better"?
You have heard me talk about the big picture in the past. Let me remind you of a couple starting points before we dig into the current situation.
In the "decades" timeframe, we have been in a Secular Bear Market which began in 2000 when the P/E ratio (using Shiller's Cyclically-Adjusted P/E, or “CAPE”) peaked at about 44. The job of Secular Bear markets is to burn off outrageously high P/E ratios over one or two decades, until finally the P/E ratio arrives back at a single-digit level, from which another Secular Bull Market can emerge.
If history is a guide, we may not yet be done with this Secular Bear Market. The Shiller P/E is at 26.2, unchanged from the prior week, and approximately at the level reached at the pre-crash high in October, 2007. Even though P/E's are substantially lower than their crazy peak in 2000, they are nonetheless at the high end of the normal historical range and leave little if any room for expansion. This means that the stock market is unlikely to make gains greater than corporate profit growth percentage, if that. (note: all P/E references are to the Shiller P/E values, sometimes called PE10 or CAPE, which are calculated so as to remove shorter-term fluctuations; see robertshiller.com for details).
In fact, since 1881, the average annual returns for all ten year periods that began with a CAPE at this level have been just 3%/yr.
This further means that above-average returns will be much more likely to come from the active management of portfolios than from passive buy-and-hold. Although a mania could come along and cause P/E’s to shoot upward from current levels (such as happened in the late 1920’s and the late 1990’s), in the absence of such a mania, buy-and-hold investors will likely have a long wait until the arrival of returns typical of a Secular Bull Market.
So, what does it all mean?
My best guess is that days like we saw today (July 31st, 2014) where the Dow Jones Industrials dropped almost 2% ( - 377 points) will become more common as we roll through the rest of 2014. We have had a good run, generally trending 'up' since the market bottomed in the spring of 2009. In short - we are probably 'due' for a pullback.
So, what should I do?
Prudence suggests you should check in with me to ensure your portfolio is still invested in line with your goals. If you invest with me through the Advisory platform, using Trust Company of America, you are already expecting me to adjust allocations and exposure to the market as conditions dictate. If you still have traditional mutual funds with me it might be a good time to review those positions and consider other options if the situation fits.
I believe we are coming into another market cycle where the alternative investments I use in my practice may also make sense. Each situation is unique and we should discuss what is suitable for your individual goals.
Now may be a good time to share these ideas with your friends and colleagues - feel free to send them my way for "first meeting" if they are looking for a more hands-on approach to their portfolio management.
A couple new tools to help:
If you haven't done so already, please take a moment to complete a Riskalyze risk tolerance survey. Just head to this link and follow the instructions, it's quick and valuable to our work together https://pro.riskalyze.com/embed/d4335d2eeb8affc9199b
Second - follow me on Twitter and/or LinkedIn and stay informed more often when things are changing at Alternative Strategies Group. Just click on the links to get signed up: https://twitter.com/investASG and http://www.linkedin.com/pub/jason-erickson/12/145/8ab/
Have a great week!