Markets registered what appeared to be a relatively tame week; Friday saw a melt up in stocks. I would attribute most of the melt up in stocks to the bond market being closed for Veterans Day. The last time we had bond markets closed (October 10th), we saw a very similar occurrence of the market rising sharply in the absence of bond trading.
Speaking of Veterans Day – From an Army brat to the many of you who have served our country, thank you!
Until the year 2000, the Investing Road seemed clear. While we had recessions and market pullbacks, a diversified portfolio of stocks and bonds could see you through. However, after 2000, the Investing Road changed dramatically. The changes came in the form of low interest rates, engineering of new financial products, and financial regulations that became more relaxed. But, these changes were not realized for quite some time. In 2008, the world woke up to the reality of just how dangerous Investing Road had become.
Unfortunately, since 2008, Investing Road has not gotten any safer. Quite frankly, it has become infinitely more dangerous. Leading into 2008, US unemployment was low, home prices were up, the stock market had moved well off its 2002 lows, Europe was a non-issue, the US deficit was bad-yet-manageable, interest rates were on the low end of respectability, and the money supply had not exploded yet. So, looking back to the beginning of 2008, Investing Road appeared to be in a safe neighborhood.
What does Investing Road look like today? Let’s start with Investing Road’s neighborhood. As of now, we have high unemployment, a lot of uncertainty around China, exploding debts, a depressed housing market, and Europe is a disaster. Investing road is now littered with mines in the shape of low interest rates, an overvalued stock market, European countries drowning in debts, looming sovereign defaults, financial corruption, and a currency war.
I believe that the most successful investors over the next few years will be the ones that find and avoid the bombs. Over the last 25 years, market bomb detection and avoidance was not as important as it today. Why? Very simply, the global economy has changed, and more risk is being added through government created moral hazards. It is imperative that investors understand the current environment as a dynamic one. The reality is that anyone could be arrogant enough to overlook the risks and try to go down Investing Road without due caution. It is imprudent for investors to try to just sprint down Investor Road without a thought to the risks involved. Sure, some investors may ignore risk and be lucky enough to run the market gauntlet without harm, but investing for the long haul is not a single event. It is a series of decisions – a series of runs through the gauntlet. Success in the future is going to be highly correlated to prudence.
Do you have an investment strategy that seeks to protect your portfolio against volatile economic conditions? Call me to schedule a free review of your current investment portfolio – 913.693.7918.
John P. Chladek, MBA, CFP® is the President of Chladek Wealth Management, LLC, a fee-only financial planning and investment management firm specializing in helping families and couples who are not yet retired realize their financial goals. For more information, visit http://www.chladekwealth.com.
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