In the last issue of Seasonal Musings, we discussed the prospect of a "lost decade" of returns in the U.S. stock market. Is that what we're starting to experience? Either way, the best way to protect your portfolio against the possibility of a lost decade is to diversify it into other asset classes and into less expensive sectors. Read on for more details.
The prospect of another "lost decade" for U.S. stock market returns has been getting a lot of attention in the media recently. Late last year, Barron's, Morningstar and MarketWatch all published articles about the possibility of the S&P 500 generating little or no returns during the next 10 years.
When the U.S. stock market is expensive, diversifying your portfolio away from that asset class becomes even more important, either to reduce risk and/or to supplement future returns. Here are some possible moves to consider:
About a year ago I wrote an article in this space entitled "Retirement Risks Are Mounting". This conclusion was based on the triple threat to retirees - and those close to retirement - of low bond yields, lofty stock market valuations, and rising inflation.
Several recent surveys indicate that inflation has now overtaken the pandemic as the primary concern among investors and retirees. Allianz's 2020 Retirement Risk Readiness Study concluded that 57% of Americans are worried that inflation will make basic retirement expenses unaffordable. If in fact inflation does re-emerge after decades of benign behavior, it will be particularly damaging for those close to, or in, retirement.
It's sometimes said that sound portfolio management is simple, but not easy. In other words, the concepts behind successful portfolio management are reasonably easy to grasp in theory, but are counterintuitive and emotionally difficult to implement consistently in practice.
Buyers often seem unaware of the shortcomings of annuities until well after their purchase. Equity-indexed annuities are no exception to this statement. While the downside protection they offer is not at issue here (but is subject to the claims-paying ability of the insurance company involved), the upside potential of these products is often vastly exaggerated (or misunderstood) by salespeople motivated by nothing more than the prospect of sales commissions averaging about 6% of the amount invested.
"Advisor Background Checks a Must, Warn Regulators." "SEC Urges Consumers to Run Background Checks on Advisors." These were recent headlines in Financial Advisor magazine and the by-product of a campaign by the SEC and by other regulators of financial advisors to raise public awareness of the BrokerCheck tool. The Financial Industry Regulatory Authority (FINRA) manages the BrokerCheck website, and this online database allows consumers to investigate their current or prospective advisors, and the firms that employ them.
Credit unions are a big part of the financial services landscape here in Utah, much more so than in other states. I use a credit union for both my personal and Five Seasons Financial Planning bank accounts, something I never even considered when living in the Northeast. And many clients also use them for banking and loans. But apparently the investment services and financial advice being offered by credit unions here in Utah are not necessarily what they seem.
“You make most of your money in a bear market, you just don’t realize it at the time.” This statement must seem like a paradox when your portfolio balance is declining at an alarming rate on a weekly basis. But "money is indeed made" in a variety of ways during financial market upheavals like this one. And doing so doesn't require any particular market-timing skills or short-selling prowess, but it does require a disciplined and consistent approach to portfolio management, a focus on the longer term, and a certain amount of courage and conviction.