Money is important. Not as a measuring stick for success, but because it allows for things we care deeply about. These things range from being able to put our children in good schools to taking care of an aging parent.
Warren Buffet has this picture of Ted Williams in his office. The lesson? Wait for the pitch you want to hit.
Investing is emotional. Seemingly our lives are in the balance of some “Invisible Hand” that we can’t control. The S&P 500 is crowded by a few large companies, whose valuations are similar to those of the 2000 era Tech Bubble.
This isn’t to scare you. It is to help you understand if the risks you are taking in your portfolio, and if it’s worth the reward.
One of my favorite movies is Limitless starring Bradley Cooper and Robert Dinero. It reminds me of the human need for constant expansion. See below:
Eddie Morra : [at a party] … Well, sure, y-you get a short-term spike, but wouldn’t that rapid expansion devalue the stock completely in two years?
Eddie Morra : Against aggressive overexpansion? There aren’t because there are no safeguards in human nature. We’re wired to overreach. Look at history, all the countries that have ever ruled the world: Portugal, with this big, massive navy – all they’ve got now are salt cod and cheap condoms.
[crowd laughs]
Eddie Morra : And Brits? Now they’re just sitting in their dank little island, fussing over their suits. No one’s stopping and thinking, ‘Hey, we’re doing pretty well. We got France, we got Poland, we got a big Swiss bank account… You know what? Let’s not invade Russia in the winter. Let’s go home, let’s pop a beer, and let’s live off the interest.’
So, where are we to turn?
Allow me to introduce the Efficient Frontier:
The Efficient Frontier states we should be able to get a higher long-term rate of return and less risk with diversification. Unfortunately, given historically low interest rates, diversification has been hard to find the over the last decade. Under normal economic conditions many of us would be in a traditional 60% Equity/ 40% Bond portfolio. However, given their low interest rates, bonds have been a poor investment over that time. Thus, the American investor has been pushed into a full equity portfolio with little risk mitigation or diversification.
A fundamental of investing that we should all understand is that when interest rates go up, the current market value of bonds goes down. The reason is this. Why would you lock up your money for 10-20 years today, when a new bond is likely to pay you a higher rate tomorrow?
Later this week the FED will meet virtually to discuss the economy. The FED’s job is to speed up or down the economy. Currently the economy is moving fast.
The traditional standard is “ride it out”. Perhaps that is fine. The “Most Important Thing” (a wonderful book by Howard Marks) is that you have a strategy.
There are things we can control, and the financial world is moving fast too. At Future U, https://futureufinancial.com/ we are using these tools to educate our clients so they can make better decisions for their families.
See below for a Sample Risk Report:
Here are some risks/rewards for the market today:
Reasons to be Optimistic:
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The US Consumer is strong
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Delta Variant does not appear to be stalling the economy
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Housing is strong
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All time high for job openings
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A very high “quit rate”,
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meaning people are comfortable risking quitting bad jobs for better ones.
Reasons for Concern:
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2022 will not see the level of economic stimulus such as 2020/21
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Wages are expected to be higher
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Inflation is higher
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Corporate earnings are expected to be lower
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Interest rates will likely be higher
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The S&P 500 is overvalued compared market forecasts.
With investing, like comedy, you have to get the timing right. If you mess up a joke you lose a few laughs. If you mess up your portfolio you might be working a few extra years. The S&P 500 has doubled from it’s pandemic bottom. I’d rather error in being cautious than too risky.
Even in the best baseball players, such as Ted Williams only hit the ball 36% of the time. They key is to not strike out.