It may be time to take some profits
With U.S. stock markets not far from record highs, it’s not surprising to hear that most analysts, economists, and investors are increasingly bullish about the stock market. After all, weren’t most TV financial gurus bullish all the way up to the last two devastating market crashes? If you listened to them you may have lost a small (or large) fortune? If we get our news from television, think back; were there any guru’s suggesting to sell stocks before the crashes of 2000 and 2007? Of course not. Many of them make their money by getting you to invest in their funds so they are always bullish. They don’t preach against the trend and suggest taking profits, because it’s just not popular. They want you to forget what you lost in the last crashes.
In the investment world we have Bulls, Bears and Pigs. The pigs usually get slaughtered. Which one are you? How much did you lose in the Crash of 2000, then again in the Crash in 2007?
Many investors investment philosophy is usually not scientific, they are driven by fear and greed.
We meet with investors every day who are heavily invested in the stock markets and scared to death of losing. Their approach is “Buy and Hope.” They are certain we will have another market collapse like in 2000 then again 2007, but they don’t know what to do. They don’t want to sell their stocks and funds because of greed. They want to make more, but they are afraid of losing 50 percent or 70 percent, or more – again.
Many don’t know what to do and are frozen in fear and indecision. They are afraid to stay in the markets, but too greedy to get out. Many investors don’t realize there are alternatives – investments which do not correlate (move with) the stock markets, bond markets or interest rates. Alternatives offer diversification not available with stocks, bonds and funds.
Do you remember the Crash of 2000 (3-24-2000 to 10-9-2002)? The stocks we called “Dot-Com” became Dot-Gone. Hundreds of Dot.com stocks disappeared. The S&P 500 lost almost 50 percent. If you owned GM you lost every dime you invested. Somehow, the new GM (Government Motors) still has all your assets, but the new stock was given to political donors (Unions) and you got nothing. Even the largest, and most widely held stocks, like Cisco, lost 88 percent, Intel lost 81 percent, Microsoft lost 61 percent and the world’s largest company, GE lost 59 percent.
None of these stocks got back to “even” from the Crash of 2000 when it happened again. In the Crash, or economic collapse of 2007 (10-9-2007 to 3-9-2009) Cisco lost 59 percent, Intel lost 51 percent, Microsoft lost 50 percent and the world’s largest company, GE lost 82 percent, 40 percent worse than in the Crash of 2000.
Do you remember the gut-wrenching feeling when the world’s largest stock market, the S&P 500 plunged 57 percent in the Crash of 2007? How much of your portfolio did you lose? Many investor we have met with own stocks and funds that dropped, plunged 50 percent to 70 percent, or more, in the last crash.
Since the stock market peak (3/24/2000), how well have the largest and most widely held stocks done? As of January 16, 2015 Cisco is still down 65 percent, Intel is down 48 percent, Microsoft is down 17 percent, and the largest market cap company in the world in 2000, GE, is still down 56 percent. Let’s not forget WorldCom and Enron, which along with GM no longer exist.
Many investors pulled out during the crash at, or near the bottom - afraid to ever get back in the markets. They missed out on one of the biggest rallies of all time, about a 205 percent rally. After the S&P 500 losing 57 percent in the Crash of 2007 the first 232 percent increase was a recovery – not a rally. Too many investors forget to “Buy Low – Sell High.”
S&P 500 Growth Not Great?
Most investors are surprised to learn that the S&P 500 has only grown a total of 34.8 percent since its high of March 24, 2000. The S&P 500 has only grown 4.3 percent annually over the past 15 years (with dividends,).
Are you doing anything different this time? Probably not.
The definition of “crazy” is doing the same thing over and over again, expecting different results.
It is important to periodically have an in-depth Portfolio Review and Risk Analysis. Most portfolios we review contain 97 to 99 percent stocks and equity funds. Many are much riskier than the S&P 500, even while underperforming the index. Many investors had not realized they were far out-of-balance from their Risk Profile so we suggested some rebalancing.
Expanding Economy?
Oil and copper show a contracting, not expanding U.S. economy. We can see that oil and copper move lock-step with the S&P 500 stock market index – until now. Oil and copper, two major measures of growth have headed sharply down, while somehow the stock markets have been pushed higher. Can this happen? Not too likely.
How can we protect our profits (this time)? We suggest diversifying. While diversification alone is no guarantee of future performance, doing the same thing we did in the last two crashes is likely to offer substantial losses, just like the last crashes.
One option is investments which guarantee your income for life (regardless of the stock markets, interest rates, etc), and guarantee to increase in your future income, which then locks-in a minimum income for life (which can ratchet higher). They may also lock-in a guaranteed death benefit for your family, and this death benefit may also ratchet higher with investment performance. These are, of course, annuities. Only annuities offer guaranteed income for life and guaranteed death benefits, which are backed 100 percent by the issuing companies.
Then there are alternative investments which do not “correlate” or fluctuate with the stock markets, bond markets, or interest rates. Alternative investments are used in the “endowment” style investment model popularized by Yale and Harvard. These endowments use non-traditional, non-correlated, and many times non-liquid assets to protect their endowment when stock markets fall.
Scott L. Olson is president of Atlantic Financial Advisors, LLC, and is a Registered Investment Advisor. With 36 years’ experience in Financial and Estate-Planning, Wealth Preservation and Wealth Transfer, Scott has been a popular speaker across the U.S. to groups of Attorneys, CPAs, Financial and Estate Planning professionals. He provides Continuing Education courses to Attorneys, and CPAs. Scott’s expertise includes, not just Roth-Conversion, but tax-free, or “Substantially Discounted Roth-Conversion©” and the Annuity Arbitrage, a tax-favored income and estate-tax free wealth transfer technique. He can be reached at scott@atlanticfinancialadvisors.com
This information is for educational purposes only and NOT an offer to sell any security or insurance product and is NOT an endorsement of any specific Alternative Asset.
Securities offered through Financial West Group (FWG) - member FINRA/SIPC. Atlantic Financial Advisors, LLC, Registered Investment Advisor not FWG affiliated.
