It seems like people are pretty nervous about the stock market right now. A lot of people are seeking us out for the safety and protection we offer investors. I am hearing a lot of comments from people about the market being overvalued.
Are they right? Does anybody really know the answer to these questions?
The two biggest macroeconomic risks are still the risk of recession and the risk of inflation. We have been dealing with the inflation risk for two years and the recession risk for about a year.
If the worst case happens for both of these risks, the market will definitely take a big hit. Entering a recession would likely lead to a 25% to 30% drop in stock prices from the current levels. An uptick in inflation would lead to continued tightening from the Fed, increasing the chances of a recession.
But recent inflation news has been positive, and the economy keeps chugging along. GDP growth has been excellent, and unemployment is still at all-time lows.
I like to look at history for some of these answers. If we exclude the pandemic driven mini recession of 2020, it has been about 15 years since our last “business cycle” recession. Before 1990, recessions occurred about once every four years. Since 1990, recessions have occurred about once every nine years. Some people say we are due for a recession.
Our proprietary MARKET VALUE INDICATOR (graph below) suggests that the S&P 500 (the best barometer of the stock market) has moved into “overvalued” territory this year. The rapid increase in stock prices since November of last year to March 1st this year has taken the indicator from a level that was “undervalued” by 10% to being “overvalued” by 6%. But please note that we do not do any trading off of this indicator. It is not a predictive indicator because the stock market is so irrational. It is just a guide.
The reality is that these market and economic risks always exist for stock market investors. And, unfortunately, most of the risks come from unknown factors.
The risk of stock market meltdowns is the price of admission for investors. No one ever knows the timing or the magnitude of recessions or bear markets, but you know they will happen at some point. Those risks are ever present even if they don’t happen very often.
The biggest risk as I see it for most investors has nothing to do with the economy or markets at all. The biggest risk is you.
There is a risk that you’ll abandon your investment plan and make a big mistake at the worst possible time. Fear and greed cause most people to make poor decisions.
Guessing at what is going to happen or listening to someone predicting what is going to happen rarely works out. Even if you get lucky and reduce your stock exposure at the right time, you will lose because you won’t get back into stocks at the right time.
This is why I created the Beyond Buy & Hold system. The only way to win in the investing game is to focus on the long-term. We can be quite confident that the stock market ten years from now will be much higher than it is right now. But nobody knows what stock prices will look like in six months or one year.
The best investors need a disciplined approach to owning the best funds and a proven quantitative system to avoid the worst of bear markets. Our MARKET SIGNALS investing tool gives investors just that. It puts the odds in your favor.
The stock market is in an uptrend 85% of the time, growing at double digit rates. You want to be aggressively invested (100%) most of the time. Having a proven system to sidestep the bear market crashes gives investors the confidence to invest aggressively in the stock market. You don’t have to worry when you know you have a system to avoid the damage caused by bear market crashes.
Changes to your investing strategy based on short-term reactions that are not based on proven and tested data will hurt your investing results. You need a disciplined and proven system to win in the investing game. Stay disciplined my friends.
Happy Investing,
Phil
Disclaimers The Beyond Buy & Hold newsletter is published and provided for informational and entertainment purposes only. We are not advising, and will not advise you personally, concerning the nature, potential, value, or suitability of any particular security, portfolio of securities, transaction, investment strategy or other matter. Beyond Buy & Hold recommends you consult a licensed or registered professional before making any investment decision.
Investing in the financial products discussed in the Newsletter involves risk. Trading in such securities can result in immediate and substantial losses of the capital invested. Past performance is not necessarily indicative of future results. Actual results will vary widely given a variety of factors such as experience, skill, risk mitigation practices, and market dynamics.
HOW MUCH SHOULD YOU CONTRIBUTE TO YOUR 401K?
This question is a primary concern of most 401K investors. This question creates anxiety in most 401K investors.
You are probably unsure about the answer.
We are not going to be able to provide you with the full answer today, but we want to start you down the path to answering this question and to becoming confident that you will have enough money to retire comfortably.
Like most of these questions, the answer is “it depends”. The answer is specific to each individual and it depends on a variety of factors:
The age at which you started contributing to your 401K.
Your current age and account balance.
Your investment strategy.
Your expected income needs in retirement.
Your expected increase in your income in your working years.
At the risk of oversimplification, today we are going to use simple examples to illustrate the two most important factors – the age at which you started contributing to your 401K account and your investment strategy. We help our customers with these calculations for the specifics of their individual situation.
If you start your 401K account in your twenties, you won’t need to contribute as much from each paycheck compared to starting in your forties. The compound effect of investments is more powerful when your money has more time to grow. Today, we will compare someone who started their 401K account at age 30 to someone who started at age 40.
The average 401K investor only generates annual investment returns of 5%. But most people in our audience pay more attention to their 401K and use some version of a Target Date fund based on the Asset Allocation model recommended by the investment industry. We will assume, therefore, that most people are generating investment returns of about 6.5% per year - still not very good but better than average.
We also used 3% for the company match amount. This is the average company contribution percentage.
Our objective in this exercise was to replace current income in retirement. The assumption is that Social Security will cover the impact of inflation in the future. Again, everyone’s situation is unique, but we wanted to use reasonable assumptions to illustrate the key points.
In the table below you will see that someone that starts contributing to their 401K at age 30 and uses a Target Date fund for their investment approach, needs to contribute about 7% of their income to their 401K each year to replace their income in retirement. This is close to the 6% average contribution percent for 401K investors. So, starting early only requires a modest contribution.
The person who waits until age 40 to open their 401K account needs to contribute much more to replace their income in retirement. If they use the Asset Allocation approach (Target Date funds) like the 30-year-old, they will need to contribute 20% of their income to their 401K. This is probably not doable for most people and clearly demonstrates the benefit of starting early with your 401K account.
Starting at age 40 or later will require a better investment strategy to reach your retirement goals. In the table, we compare how much the 40-year-old will need to contribute if they utilize a more aggressive growth strategy for their investments. With a better investment strategy that generates higher returns, the 40-year-old can reach the same retirement income level by contributing 13% of their income versus the 20% needed for the Target Date fund approach. The 13% figure is still a challenging contribution level, but it is more doable than 20%.
The 40-year-old can rescue their retirement by using our Market Signals investment system which would only require a 6% contribution to reach the same retirement income level.
If you start contributing to your 401K account after age 35, you absolutely need a better investment strategy to make up for lost ground. An aggressive growth strategy helps all 401K investors, but it is very important for the people who start later. Our Market Signals system is ideal for people who are running behind with their retirement accounts.
Happy Investing,
Phil
Disclaimers The Beyond Buy & Hold newsletter is published and provided for informational and entertainment purposes only. We are not advising, and will not advise you personally, concerning the nature, potential, value, or suitability of any particular security, portfolio of securities, transaction, investment strategy or other matter. Beyond Buy & Hold recommends you consult a licensed or registered professional before making any investment decision.
Investing in the financial products discussed in the Newsletter involves risk. Trading in such securities can result in immediate and substantial losses of the capital invested. Past performance is not necessarily indicative of future results. Actual results will vary widely given a variety of factors such as experience, skill, risk mitigation practices, and market dynamics.
For centuries, the United States stock market has been the best place to invest your money compared to just about every other investment. The U.S. stock market has produced more millionaires and more billionaires than any other asset class.
The table below shows the average annual returns of the S&P 500 and the Nasdaq over various time periods.
Over long time periods, the S&P 500 produces annual returns of somewhere between 9% and 11% including dividends.
The Nasdaq tends to outperform the S&P 500 by about 1% to 2% per year over time. The returns for the Nasdaq-100 are even higher. But the Nasdaq tends to be more volatile than the S&P 500. It tends to drop by a higher percentage in bear markets, but it also tends to increase more in bull markets.
LOTS OF STOCK MARKET INVESTMENT OPTIONS
There are, however, thousands of choices when it comes to the stock market. Because of this, it can be confusing when people talk about the stock market or stock investments. To reap the benefits of stock market investing, you can invest in individual stocks, mutual funds, index funds, international stocks, growth stocks, value stocks and more.
Having all these options makes the investing process more confusing for most people.
You’ll hear lots of reasons why you should be investing in many or all of the different types of stock investments listed above. But you should ignore this noise. The truth is that the S&P 500 and the Nasdaq beat all the other options in the long run.
No mutual funds (individual stock pickers) can beat the S&P 500 over long time periods (10 years or more). International stocks can’t match the returns of the S&P 500 in the long term. The S&P and the Nasdaq are considered large-cap stock indices, and large-cap stocks beat mid-cap and small-cap stocks. Value stocks and growth stocks might have strong performance during particular time periods, but nobody can accurately predict when that will be.
There is a dark side to the stock market, however.
Individual stocks can lose their value and stay down. Some stocks can and do go to zero if the company goes out of business, but the aggregate markets as represented by the S&P 500 and the Nasdaq don’t go out of business or go to zero.
The stock market crash of 1929 was legendary. Investors were wiped out in a short period of time as the stock market dropped by 50% in a matter of weeks. Over two and a half years, from late 1929 to mid-1932, the stock market lost almost 90% of its value.
While we haven’t seen anything like the 1929 crash since then, there have been plenty of difficult and painful bear markets. The 2022 bear market saw declines of 25% to 35%. In the painful market crashes of 2000 and 2008. The S&P 500 dropped by 48% from 2000 to 2002 and fell by 56% between 2007 and 2009. The Nasdaq declined even more than the S&P 500. Watching our 401(k) accounts get cut in half was an awful experience.
When you invest in the stock market through an index fund representing the S&P 500, you can be extremely confident that the value of that investment will grow significantly in the long term. You can be much more confident in the increasing value of your stock market investment than you can be in the performance of bonds or commodities or real estate in the long term. And you can be much more confident in the performance of the S&P 500 than you can be any specific individual stock’s performance.
Why is that necessarily true? How can we be so sure of the gains from the stock market in the future? What do stocks have going for them compared to the other asset classes?
Our entire political and socio-economic system is designed for companies in the stock market to succeed. Let’s look at the incentives that help to propel the stock market higher over time:
All 500 companies in the S&P index have tremendous incentives to grow. The management, board members, shareholders, and employees all have huge incentives in place for those companies to be successful.
Local, state, and national governments are incentivized for those companies to grow. Tax revenues and job opportunities benefit all government entities.
The general population wants good-paying jobs in their communities.
Investment capital flows to growing and successful companies.
The incentives that drive the stock market are not in place for bonds, commodities, or real estate. Most people would prefer that the price of commodities and real estate remain constant or even go down. Consumers and governments don’t like price increases. Look no further than the inflation challenges we face right now. Most people would prefer that interest rates on bonds were lower rather than higher. Higher rates limit borrowing, which inhibits economic growth. There are people who benefit when prices increase, but they’re in the minority.
The other factor to consider is innovation. It’s innovation and productivity that drive the increase in company value and, therefore, the stock market. We have a highly innovative and productive economy, and I see no reason for that to slow down in the future. One could even argue that innovation is accelerating rather than slowing down.
The only factor I see that could get in the way of the 8% to 9% continued annual growth of the stock market would be a collapse of our political system. Given the events of recent years, one can’t totally rule that out. But even in the most extreme political upheaval, the same incentives for market growth should still be in place. There is way too much money at stake. Major political disruption would likely have a massive short-term effect on the stock market. But I firmly believe that after a period of time, the stock market will continue growing.
The stock market is a tremendous way to grow wealth. But investing in the stock market is even better with our Beyond Buy & Hold system. Our Beyond Buy & Hold system protects investors from major short-term collapses regardless of the reason. You can get the best of both worlds. You can get excellent long-term growth from stocks and protection against losses. You need a better approach than simply “riding it out” during stock market meltdowns.
Who wouldn't want annual returns of 10% to 14% per year AND protection against losses during bear market crashes?
Happy Investing,
Phil
Disclaimers The Beyond Buy & Hold newsletter is published and provided for informational and entertainment purposes only. We are not advising, and will not advise you personally, concerning the nature, potential, value, or suitability of any particular security, portfolio of securities, transaction, investment strategy or other matter. Beyond Buy & Hold recommends you consult a licensed or registered professional before making any investment decision.
Investing in the financial products discussed in the Newsletter involves risk. Trading in such securities can result in immediate and substantial losses of the capital invested. Past performance is not necessarily indicative of future results. Actual results will vary widely given a variety of factors such as experience, skill, risk mitigation practices, and market dynamics.
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