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:
The impressive year-to-date returns in the S&P 500 and in the NASDAQ index without the benefit of much growth in corporate earnings or sales has resulted in our stock market becoming expensive, and by some measures very expensive. In discussions with clients, I am often asked how I come to the conclusion that a given stock market is cheap or expensive.
I urge you to embrace bear markets as opportunities, as recurring market phenomena that can't be effectively avoided. This is the bright side of bear markets:
Historical Perspective on the Bear Markets of 2022
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.
In the last two installments of the Five Seasons Financial Planning blog, Articles on Wealth Management Topics, we spent a fair amount of time discussing inflation and the risk it poses to retirees' finances. If anything, inflation has become even more of a concern since then.
Retirees in particular tend to be exposed to purchasing power risk, the risk that their sources of income don't keep pace with the inflation of their living expenses.
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.
There's no doubt that lower fund management expenses and lower transaction fees are beneficial to investors - all other things being equal. But that's the rub. There are several other cost considerations in choosing which ETF to buy, and when to buy it, that can easily outweigh whether you pay or receive 50 cents per $1,000 invested per year, or whether you pay your broker nothing or $7 per trade.