As 2019 comes to a close, most of us will review our portfolios and say “Wow”. 2019 is shaping up to be one of the best ever for investors, with almost every asset in the green.
All of the major asset classes, like stocks, bonds, real estate, and commodities, reaped a profit this year. That is because of healthy GDP growth, positive momentum with China on the trade war, and a very lenient federal reserve lowering interest rates to keep money cheap.
All of this means the S&P 500 is up more than 25% (and counting). Treasury debt, which tends to fall in value when more risky assets like stocks gain, also plowed forward in 2019. Oil, gold and corporate bonds all scored sky high returns.
I know it seems too good to be true (and it definitely won’t last forever) but 2019 will be remembered as one of the best investment years of all time. And things could turn at any moment.
Read More: How to Rebalance Your Portfolio
As long-term investors, we need to look at this objectively:
Currently we are in the longest running bull market in history. The market began running from its bottom in March 2009 and, although it has hit bumps here and there, has kept chugging along ever since. Its length has recently topped the previous longest running bull market of the 1990s, which lasted 113 months.
Being late in the investment cycle means we should look at options to defend our capital. That does not mean we totally sell off our stocks and buy a doomsday bunker - but we should reposition and become more defensive than we usually would be as the cycle runs longer.
Whether that is going from a 10% cash position to 25%, or carrying 12 months of emergency fund coverage instead of just 6 months, these tactical changes can help you weather the impending storm. Safety first.
This is because It is not a matter of IF a recession will happen, it is a matter of WHEN.
By positioning defensively, meaning holding more cash or bonds than we usually do, we will not reap the full value of the stock markets returns if it continues to go up.
For example: If we have $100,000 currently invested, all in stocks, and we move 25% of that to cash, we will only have $75k exposed to the markets fluctuations. This means if the stock market returns 10% in 2020, we will only make $7.5k instead of the $10k we would have made if we left the full $100,000 invested.
However, if the market starts to go down, we will have a larger cash pool to buy stocks while they are cheaper.
I think the best way to think about this is again, risk mitigation and safety. You can live to fight another day by:
Check this out: You are Putting Your Money at Risk
If you are into data analysis, check out this site for historical stock market returns, inflation data, etc.
It has a great breakdown of what returns have been in the past. Now, we know that the past is certainly not a concrete indication of what the future will look like, but it can guide us in the right direction.
The past tells us that, historically, the returns we are seeing in the stock market this past decade are abnormal and should NOT be taken for granted. We should appreciate the returns, but be wary of the future and protect our capital. Note that I am not alone in believing this:
The economists at investing giant Vanguard predict that, over the next 10 years, annual U.S. stock market returns will likely average between 3 percent and 5 percent. When you factor in inflation — which, luckily, Vanguard predicts will be below 2 percent — the real rate of return is expected to be under 3 percent.
When Vanguard, one of the largest money managers in the world, expects low returns AND flat out says it to everyone in the world, you know it is something to look into.
We know that we are in the latest stages of this bull market, but it seems like returns are stronger than ever. While we can take advantage of and appreciate the growth we have seen in this market - we should know that it can’t last forever and be prepared for the worst.
Be prepared by paying down those debts, saving more in cash reserves, and keeping your wits about you as an investor/trader. This does not mean we stop investing all together. It means we get and stay prepared to weather the storm.
If you are interested in learning more about investing and trading check out the Introduction to the Stock Market here
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