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.
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.
2019's SECURE Act contains two provisions that make converting IRAs and retirement plan accounts to Roths more attractive:
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.
“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.