"I'm going to retire and live off my savings. What I'll do the second day I have no idea."
~Anonymous
"One of the interesting things about the stock market is that every time one person buys, another sells, and both think they are astute."
~William Feather
When I created my Updated Bucket List for my Year 77 I included a task to re-evaluate and address my long-run retirement needs from a financial perspective. I manage my own investment portfolio and my feeling has been that you should consider the appropriate risk level for your portfolio when you are reviewing your long-term goals and not when you're having an emotional reaction to a market correction. This blog is not intended to be a suggestion for anyone else, but simply my own assessment of what works for me as I have entered what I refer to as the "4th Quarter" of my life. I view my Year 77 blogs like a diary and I will refer back to them in the future to see what my views were and how they may have changed over time.
The above is a preferable activity to managing investments.
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New Input as of 10/18/17: This blog, and all my Viewpoints shown below, were written over the last few weeks to be published today. I was surprised by an article appearing in the Wall Street Journal yesterday that was not only interesting, but involved the number seven which has been so important to me during my Year 77. The gist of the article is as follows and it will be interesting to watch what happens during the remainder of the year:
"Market's Unlucky-Sevens Streak in Danger"
"Unless the rising stock market suddenly slams into reverse, a streak of market unrest dating back more than a century is on the verge of coming to an end this year. Each year ending in 7 dating back to 1887 has included a sharp decline in the late summer or early fall, but this year the sailing has been smooth --- at least so far."
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Viewpoints:
Economy and Markets: Whichever direction the economy and markets are going at the moment, most people seem to believe that they will go that way forever. The economy has been slowly gaining strength and we have been in an up stock market since early 2009. During October 2017 the S&P 500 Index had accumulated the longest streak of higher record closes in twenty years! The Greater Fools Theory is in full operation and it can continue to work, until it doesn't. While the market can clearly continue to go up, and many of the investment guru's are saying it will, I have decided not to bet on that. I say "bet" because investment risk is largely invisible before the fact. In addition, when markets do go down, they can go down quickly, and they can stay down for a long time. I'm not really interested in finding out just how long a down market might last the next time around. On these points I like the following quotes:
"The air goes out of the balloon much faster than it went in."
~Sheldon Stone
"The market can remain irrational longer than you can remain solvent."
~John Maynard Keynes
"It's only when the tide goes out
that you find out who's been swimming naked."
~Warren Buffett
Central Banks: Solving the problems of the Great Recession was complicated and I don't claim to understand all the implications nor do I have an idea of something different that should have been done. However, it has been almost ten years and it doesn't appear that our smartest people are sure that the problems (in the U.S. or in the world) are yet solved. The central banks have manipulated and distorted the financial markets through quantitative easing and other monetary accommodation (resulting in zero to negative interest rates and bloated asset values) to the extent that no one seems to know just how our current situation will end as the central banks try to "normalize" interest rates. Most of the investment guru's are saying things like, "You have to dance while the music is playing" and "I don't know when this bull market will end, but when it does it will end badly."
"A bull market is like sex. It feels best just before it ends."
~Warren Buffett
Computerization and Passive Investing: Over the last 20 to 30 years investors have come to rely increasingly on computers to run quantitative, rules-based systems using algorithms to pick stocks, mitigate risk, bet on volatility, etc. Index funds grew to about 20% of mutual fund assets by 2014, and with the advent of ETFs, passive investing is about 37% of equity fund assets today. Passive portfolios have outperformed active investing over the last decade or so. But the passive portfolios are constructed mechanically to match the index being duplicated, without the benefit of fundamental analysis of the individual companies. High performing, and possibly over-priced stocks, are included as well as companies with no earnings. Because of the rules-based models managed by computers, it's conceivable that in a market correction, many funds will be forced by their models to sell at the same time. Once begun, selling could automatically trigger further selling. ETFs promise of liquidity has yet to be tested. It's not clear where the index funds and ETFs will find buyers for their highly appreciated holdings if they have to sell in a crunch. It will be interesting to see how this all works out.
Washington: I will not discuss politics in this blog except to say that Trump scares the hell out of me and his performance so far during 2017 has been a big influence in my move toward a more risk adverse approach to my investments (to be clear, I didn't vote for either Trump or Hillary). Also, I've been disappointed for a long time in members of Congress who seem unwilling to work together toward what's best for the country.
Risk: Despite many market indicators that are looking "toppy" (high valuations in equities and acceptance of lesser credit worthiness on risk assets), the average investor seems very complacent about an ever-increasing stock market, and the VIX Index, generally known as the "Fear Index", is at an all-time low. Many people seem to think that you should simply accept higher risk in order to earn a higher return. If riskier investments could be counted on to produce higher returns, they wouldn't be riskier. I believe that the world is an uncertain place and an investor needs to have a healthy respect for risk, an awareness that we don't know what the future holds and a practice of defensive investing.
"The market is not an accommodating machine;
it won't give you high returns just because you need them."
~Peter Bernstein
Current Investment Objective and Philosophy: I'm not saying the market is about to correct or crash - but I think there are enough things to worry about that caution is warranted. I'm currently very cautious in managing our investments. Bonnie and I have a comfortable style of living that we enjoy. Even if I were to receive a large financial gift we would not live any differently. Therefore, there is no advantage to taking risks with our investments in an effort to achieve greater appreciation. Despite my earlier comments on risk and potential loss, I am not an advocate of market timing (i.e. selling a substantial portion of investments in anticipation of a market correction or crash). I have recently moved to a more simple portfolio management approach than I have used in the past, to a higher quality and smaller equity allocation, to shorter duration on bond positions, and to a larger allocation to cash (to be used for future opportunities and distributions to my daughters). But my allocation to equities is still 55% (not unusually low for my age), 27% in fixed income and 18% in cash instruments. A few interesting and relevant quotes are:
"The cautious seldom err or write great poetry."
~Unknown
"We have two classes of forecasters; Those who don't know --
and those who don't know they don't know."
~John Kenneth Galbraith
"It's difficult to make accurate predictions, especially with regard to the future."
And the corollary, "Predicting the past is a snap."
~An old investment adage
"Everything should be made as simple as possible, but not simpler."
~Albert Einstein
I look forward with interest and anticipation to the coming years and the ever-changing important events in the world, including the economy, fiscal policy, monetary policy, world political relations, and the world's securities markets.