It’s August 2017 , and the stock market has been on a tear since the US 2016 election its been up 21%+ Dow Index, and an equivalent for the S&P 500 index., many stocks are richly valued. There’s a growing chorus of market and economic experts (Jim Rodgers, Peter Schiff, and others) that expect a significant correction in the coming months,now in fairness, there’s always going to be people who look at the glass half full, but also I think now is a prudent time to re-assess your retirement accounts.
This post is how to protect your gains in your IRA /401k (Betterment, Wealthfront or other ) type accounts, so you’re savings wont be sliced by large margins.
Reasons why market correction coming soon.
No one can predict the exact moment that the market will begin its correction, so timing the market exactly is not possible, but you can anticipate the correction based on some of these factors in in the current global environment.
- a geopolitical black swan event: Such as US war with North Korea, China vs. India war, European debt/currency crisis. Any number of geopolitical shocks could send the markets into a tail spin.
- US Debt load a an all time high. Since the 2007/2008 recession US debt levels have only increased, they briefly retreated in the subsequent years after the recession but have since grown, this includes, auto loans, student loans, some mortgages and leveraged commercial and industrial real estate(malls and such).
- Slow 1.2% GDP growth out of sync with stock prices. Stocks historically grew at a rate tied to the GDP this is not longer the case , meaning valuations are not in sync with actual economic output.
Yes! you can time the market …just not precisely
A common mantra by many traditional investors is don’t try to time the market , they say leave it in, the market will go up and down but eventually the overall trend it up. Yes, there is historical precedent for this, that you can’t time the market EXACTLY , but you don’t need to to time it precisely, just close enough to preserve your gains, and have some “dry powder” for the next up turn.
I have a lot of reservations of just sitting out and not activity preserving your money when an imminent downturn is coming. Fear is a very powerful motivator , and it wasn’t too long ago , 2007-2008, that many retirees saw there 401k becomes 201k, I bet most people will sleep better at night feeling they may have missed out on 5-15% gains , then worried sick as to when the market will come back…
The market doesn’t always come back ! as quickly as it did after 2008
My big worry is that the next correction, may be severe and worse it may be a while a long time IF EVER it returns to today’s heading valuation levels. Think the market always trends upward? See below..
Exhibit A: I like to draw your attention to the Nikkie 225 (Japan’s main stock index) circa 1990, look at the chart below it reached its peek of 38916 in December 1989 , it has never regained that value since then, let that be a cautionary tale. Sure the Japan market had different headwinds back then, mainly a shift in its economic competitiveness from its neighboring “Asian Tigers” , coupled with a speculative bubble, but the point is that Japan was a modern western economy the 2nd biggest at the time, and it has yet recover even to 75% of that lofty valuation of 1989, that was 28 years ago , how long is you’re time horizon? for more about this read the WSJ on the Japan Stock market bubble.
Consider this, why should the US markets in 2017 be immune, to a long downward trend? the world is changing and the US while still having the largest economy is entering an era with the rest of the world has much more technological and economic parity with it. On top of that add the myriad of upcoming structural changes in world economies such as increased globalization, dysfunctional US Federal government, the gig economy, automation and a graying US population, plus challenges from growing economies such as China (3rd largest, after EU block) , Brazil, India etc.. all this will change the dynamics of the global economic balance of power in the coming decades.
Steps to take to preserve your IRA , 401k (Betterment | Wealthfront) investments
I subscribe to the philosophy of Phil Town on how to deal with a market correction. Basically in involves moving most if not all of your investments into cash (or cash equivalents , ie. T-Bills, Inflation protect TIPS , Treasury ETF etc..), before the stock market correction happens. You can see his video here on “What to Do During a Stock Market Drop”
Of course you can’t time the market percisely, but you don’t have too, if you have made gains since the 2007/2008 recession now is the time to consider preserving those gains at the expense of missing out on even more market gains…
Preserving your Gains – How to Protect your retirement investments.
Here’s what you can do for each retirement service product, since they all vary a little in terms of what financial investments the allow or support.
- Betterment / WealthFront: doesn’t offer a particular way to choose individual ETF’s all you can do is move the bonds/Stock slider. Moving it to 100% bonds, according to an in-the-know Betterment rep, moves it into the SHV ETF.
If you still want to market time (not recommended), it’s more efficient to do it within Betterment. If you move the stock slider all the way to 0% stock / 100% bonds, 100% of your portfolio will be invested in SHV , an ETF that holds ultra short-term US Treasuries. That’s as close to ‘cash’ as you can get in ETF form, somewhat like a money market fund. This will happen immediately. When you decide that market prospects having improved, you can move it back to (your target allocation). This transaction will occur on the same day you make it (assuming the market is open).
- 401k / IRA Roth: Here’s its much more difficult to suggest a specific , because each plan allows different holdings, All plans generally have a cash equivalent such as a money market , you should move most of your holdings into those. Again it varies substantially by plan, ask your plan administrator if you need help.
- Consider GOLD as a hedge against inflation: Gold is not necessarily a good investment vehicle , but when world markets are in free-fall and currencies are being clobbered, investors seek the safety of gold, so consider GLD or IAU ETF’s.
Knowing when to get back in???
The hardest decision isn’t pulling your money out and parking it in cash, rather it’s knowing when to start plowing it back into the markets. This is much more complicated, one approach Phil Town mentions above, before the downturn, investigate a handful of companies that you want to buy “when they are On SALE”, what on sale means is different for different people. So use your best judgement and wait for the market correction to stabilize and then ask yourself, are the valuations in line with historical norms? Is the stock I’m interested in attractively priced for the type of company that it is? Is there a good growth or stability story? Many , too may questions, to provide a definitive blueprint, this will have to be a case by case decision that best fits your investing approach.
To all the buy and hold proponents , and the you can’t, shouldn’t try to time the market naysayers,its easy to be smug and confident when the market is performing well and going up, but ask the same person how they feel when the market is dropping by by 5%, 10% and the nightly news flashes panic like 2007/2008 when there’s a great deal of uncertainty.. who will sleep better at night.. I know I will..
good luck!=, happy bargain hunting!