Now in the 7th year of this Bull Market which greatly benefited from historically low interest rates, investors might be asking themselves these three questions:
1. Will Bonds and Stocks tumble when rates rise?
Counter-intuitive evidence suggests that both bonds and stocks will fare much better than most expect.
And stocks, as measured by the S&P 500, produced average annual returns of 9.6% when the Fed was boosting short-term interest rates during all 14 periods since the index was launched. That almost matches the 10.1% average annual return for the index from 1958. Click here. 2. Can diversification still add value?
Given current valuations on stocks, probable hikes in interest rates and plenty of political unrest, we believe it’s as important as ever to invest in a thoughtfully diversified portfolio. Perhaps legendary investor Sir John Templeton says it best:
“The only investors who shouldn't diversify are those who are right
100 percent of the time."
3. Can lower oil prices boost the economy?
4. How should I prepare for the eventual Bear Market?
Sure the notion of selling before a downturn is appealing but in reality, “timing” the market is incredibly difficult. First it’s challenging to predict the “top” though even investors who exit before a plunge are often too frightened to move to buy back before an upswing. As proof, note that the average stock mutual fund investor gained a paltry 3.8% annually compared to the S&P 500’s 11% average annual gain over the past 30 years (source: Dalbar).
Even though the S&P 500 has tripled since March 2009, we recommend against attempting to time the market and instead advocate the following:
- Ensure that your current allocation aligns with your required “rate of return”. For example, if you require a 5% annual return to achieve your long-term goals, be sure your portfolio is NOT dialed up to potentially achieve 7% (you’d have a much bigger loss when stocks eventually decline).
- Be thoughtfully and broadly diversified. It’s understandable that investors with diversified portfolios might feel frustrated; however, history has revealed time and time again that diversification pays over the long run (contact me if you’re interested in viewing the overwhelming data).
- Realize now that yes, Bear Markets do occur but they don’t last forever. Since half the battle can be avoiding dangerously reactive decisions, the old saying “knowledge is power” certainly applies to investing. We will see a bear market…we simply don’t know when. To help manage the anxiety that comes with a downturn, get your allocation aligned with your goals, be thoughtfully diversified and appreciate, in advance, what kind of losses (and gains) might be expected by clicking here.
For more information on these and related topics, please contact any of the professionals at DiMeo Schneider & Associates, L.L.C. for assistance.
