This article is for those who have read all other ‘Stock Market 101’ articles and now want to know their investment options for their capital based upon our current market outlook.
There’s no doubt that the stock market has been on an incredible run, and if you’re a wise investor, you have benefited greatly from it. However, investments are all about risk versus rewards and selecting favorable outcomes. Let’s take a look at the risk:reward breakdown based on where the market might be heading.
Our view is that due to all the factors discussed in previous articles, the upside reward potential is roughly 5%. This means that IF the market continues it’s historic bull run, we don’t believe it will gain any more than 5% above it’s previous highs. So if that’s the reward, what’s the risk?
It’s hard to say for certain, but if the market crashes like it did in 2001 or 2008, the terrifying downside risk would be around a 50% loss. Yes, you read that correctly, half of the money you’ve been diligently saving over years, or maybe even decades, could be wiped out. If you find that number absurd and don’t believe it can happen, we encourage you to take a look at what happened in 2008. Read some of the stories of those on the brink of retirement who, in a matter of a few months, could no longer afford to retire.
You’ll often hear people say things such as “just ride the wave” or “you can’t time the market”. Those phrases serve no purpose other than to deter you from trying to make sense of what’s happening in our financial world. Timing the market is only something active traders and hedge fund managers need to worry about because that extra 1% means so much more to them.
As an average person with a 401k for retirement, you shouldn’t care if you miss the top or bottom of the market by 5%, because the risk is so much higher. In general, things fall much faster than the time it takes to build them, the stock market is no different.
I’d rather be out of the market I wished I was in, than in the market I wished I was out of.
Safe Investment Options
The first thing you should do upon finishing this article is to check your current asset allocation. There are standard guidelines/recommendations for the mix of investments you should be in, and they vary with age. Early on in your career, you should be more heavily invested in riskier assets like stocks. As you approach retirement, you want to make sure you’re reducing your risk by adjusting where your money is invested.
Check to make sure you’re in the appropriate range based on your age. Taking action one step further, you may want to consider pulling some, or all, of your money out of the market until things become more clear from a global economic standpoint.
So, you’re likely asking yourself what you can do with your money if it’s not in the market. There are a number of options you can research to find what fits you best. Some of our recommendations, and the strategies we have personally taken, are:
- Gold – a safe harbor for cash in times of market turmoil. Throughout history, gold has an inverse relationship to the market.
- Bonds – have a guaranteed low rate of return. You know exactly the result you’ll be getting when you invest in bonds.
- Cash – not the greatest of options because you earn no interest on your money, but you’ll be glad you’re in cash if a recession does rear its ugly head.
If you have a financial manager, it may be a good time to bounce these concerns off her/him. At the very least, make sure you are not over-leveraged in risky assets, like stocks, based on your age and retirement goals. Stay safe and happy investing!