We need to talk about the stock market for just a bit. And before some of you tune me out because investments aren’t your thing, at least read far enough that you learn a new term with which to impress your friends. Because not only do I want you to win financially, I also want you to have a strong game socially. So here’s your chance to run out ahead of the others in attendance at your next party. Prepare to see them impressed by you.
Victorian philosopher Herbert Spencer coined a term for where we might be in the current market cycle. Economists call it a TINA Market. This translates to: ‘There Is No Alternative’ to stocks, or TINA. This means that even though the stock market appears to be valued very highly – meaning stocks are categorically expensive – there is no suitable alternative to investing in stocks. In other words, if you want to win as an investor, stocks are the only game in town right now.
We’ll touch on why this may be, but it’s important to note that a market where stocks appear to be the only way to invest means that a LOT of money is moving into stocks, even when the risk premium may not warrant their price. Taken further, this presents a scenario where investors continue to move more and more into stocks despite their potential to increase risk of loss. The result is, the stock market moves up further.
So why is there no alternative to stocks right now? Well, interest rates continue to remain very low historically. The FED has attempted to raise them quite a few times but havehesitated to move too quickly because of the pushback from investors. As a result, we’re still seeing very low interest rates persist. This means bank savings rates are low, CD rates are low, bond yields are low, annuity rates are low…at least compared to the recent ‘easy money’ of owning stocks. Thus, stock investors have been rewarded for owning stocks as opposed to other investment and savings options, inspiring them to buy even more stocks. And on and on we go. When stocks keep winning, investors buy more stocks, and stocks, therefore, keep winning.
So what’s wrong with this? In short, when one style of asset receives almost all of the money investors throw at the market, the more potential there is to see things get out of control. And eventually, the pendulum swings back for reasons that are very difficult or impossible to predict. Think war, trade war, or political unrest.
So while there’s no definitive proof that we’re in a TINA Market, there’s less proof that we’re not in one. Investors therefore, are wise to continue to diversify by owning some bonds in the portfolio, and also some annuities, and cash as well. Because while it’s great to benefit from continued outsized growth in stocks, history has shown that the tide can turn very quickly; when it does, you’ll want to own other assets that meet the requirements of a suitable alternative.
Again, whether we’re really in a TINA Market or not, prudent diversification has served investors well over time, especially those who have shorter than ‘forever’ time horizons. Retirees may need to access funds for basic living expenses or larger purchases like an RV or a nursing home stay precisely when the TINA Market turns into a market that asks for its stock winnings back. Those are the times when it’s best to not be greedy and to have a robust plan with plenty of options available.
TINA may be great, but we should also see other people. It’s not you, TINA, it’s me.
All the best,
Adam Cufr, RICP®