All investors face the same problem but with different attitudes: risk. Everyone has concerns over their investments, but our individual risk tolerance governs not only what we invest in, but how we respond when that investment declines.
There is a wing of the investment community I refer to as The Doomsayers. They aren’t conspiracy theorists nor are they crazy. They believe they have carefully analyzed the macroeconomic global situation and think the entire system is being manipulated in ways detrimental to all.
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The arguments are not without merit, but that doesn’t mean their predictions will come true. So here are the top five concerns that they think investors are facing in 2015, and my thoughts on what to do about those concerns.
1) The Stock Market is REALLY Overvalued
Earnings have risen for many stocks but in some cases, careful analysis shows EPS being driven more buy cost cuts and buybacks than top line growth. There’s all this exuberance around stocks, and yet only the past few quarters are we seeing any real economic improvement.
Still, many blue chip stocks are trading at a PEG ratio of 2 or higher, suggesting they are vastly overvalued.
For investors, you should always hold a broadly diversified equity portfolio. While some stocks may be overvalued, there are still plenty out there that are not.
2) The Bond Market if REALLY Overvalued
Some believe that the Fed’s quantitative easing program put an artificial buyer of bonds into the market for several years, driving bond prices up and yields lower. The iShares 20+ Year Treasury Bond ETF is trading just below its all time high. Everybody rushed in to get the yield.
With the Fed out of the picture, are bonds too pricey? They may be. Your best bet is maintain a broadly diversified bond portfolio, that includes short, medium, and long term bonds, along with a healthy dose of municipal bonds. Even if you are a fixed income investor, you should diversify into other income investments, including stocks.
3) Americans Are Taking on Debt Again
After five years of paying down debt (or defaulting on it), the NY Federal Reserve’s Q3 Consumer Credit Report showed that – for the third quarter in a row – Americans were taking on debt again. Three quarters in a row is a pattern.
Much of our prosperity over the past few decades has been built on debt. Some think any prosperity further driven by debt capital can only lead to disaster. The US Federal Debt is now over $18 trillion. Sooner or later, the piper must be paid, and many worry it will come in the form of massive defaults.
Your best defense is – sound familiar – a broadly diversified portfolio of many types of assets and securities. The more diversified you are, the less chance of your entire portfolio getting whacked.
4) Nobody Saves
The median retirement savings is now $2.000. Yep, that’s it. Part of it has to do with the debt problem I just mentioned. That means that people don’t have enough money for retirement, meaning they will need to work longer, and probably require government assistance.
Your best defense is to stay invested! No matter how much you may fear risk, you are at greater risk if you don’t have a very broadly diversified portfolio.
Inflation is NOT 3%. The CPI is a joke. If you want to see what inflation really is, go to www.chapwoodindex.com and prepare to choke. Yes, it’s closer to 10%.
That means those of you on fixed income are not keeping pace with inflation, meaning you are going to have to take on a bit more risk by moving into other investments besides just bonds.
By now you get the picture. Identify your risk tolerance, and build as broadly diversified a portfolio as you are capable of.
About Lawrence Meyers – Larry is regarded as one of the nation’s experts on alternative consumer finance. He consults for hedge funds and private equity via his Council Member status at Gerson Lehman Group, and as a member of Coleman Research Group’s Executive Forum. He also consults for Credit Access Businesses and Credit Services Organizations in Texas. His Op-Eds and Letters to the Editor have appeared in over two dozen major newspapers. He also brokers financing, strategic investments, and distressed asset purchases between private equity firms and businesses of all stripes. You can reach him at email@example.com.