The Market is Expensive, Bonds Pay Nothing…What Should I Do?
This past week I’ve heard this several times and read it in many online blogs, “The market is expensive, bonds pay nothing, what should I do?” Unfortunately, in the financial industry there are still many out there that need to create fear to push their products. As you read through this article, it usually comes back to the sale of an annuity, some trading platform, or a book that a one-time advisor has written.
Marketing 101: Create fear, make a call to action. These strategies do not create a win/win strategy, or a relationship. The immediate beneficiary is the salesperson. It’s Halloween if you’re in the business of selling products. They quote that the market is expensive, (based on what, I’m not sure), and there’s nothing stopping them from saying it.
Let’s break down the numbers. As of the time of writing, the S&P 500’s previous close was 3108 based on an expectation of $167 per share for 2019. That’s an 18.6 trailing multiple. Historically that would be slightly above average. When the markets have a multiple within 1 either way of 18.6 (17.6 to 19.6), the average return from the market next year is 6.6%. Furthermore, if you only take the multiples that are above the 18.6 times, the average return is still over 6%.
So, what is the right strategy when the market is “expensive”? First, if you’re right and the market is expensive, then that will hopefully correlate to a strong market return. If that’s the case, rebalancing your portfolio back to its optimal asset allocation is prudent. Second, stay the course. The bigger risk in my opinion is getting out too early and then the issue becomes when do you get back in? I personally know of investors who sold out at the bottom of 2009 and took years to get back in. Third, measure yourself against your benchmark. I know this sounds basic but given capital markets history, we see that the longer you’re invested, the narrower your range of returns will be. Remember however that assumption is that you get the return of the index after fees, which leads me into the last point… Understand exactly what you are paying for your investments. Both what your Advisor is charging AND the costs of any investments. Mutual funds and ETFs carry internal costs that are not line items on your statements. They come out of the return of the funds.
My point here is that no one, not me, not Warren Buffett, or the proverbial annuity salesman can tell you when the market is at its peak or when it hits its floor. Run don’t walk from anyone that tells you otherwise.
With that here’s the buy sell.
Source: MG&A
The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of the author and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor's results will vary. Past performance does not guarantee future results. Future investment performance cannot be guaranteed, investment yields will fluctuate with market conditions. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market.
