Financial Planner 43551

Predicting the Future of the Market

In Income Planning, Investment Management, Retirement Thinking, The Insider by Adam Cufr

Every so often I’ll read an article sent to me that says something to the effect of, “The stock market is poised for a HUGE loss, according to someone really smart.” I genuinely appreciate receiving these articles because I want to know what you’re reading out there, and if there’s validity to the article then let’s learn from it! With that in mind, I want to share a few thoughts about a recent article shared with me by some really awesome people who had some very real concerns.

The article we’re looking at is ‘Man credited with calling the 2008 crisis says the next 20 years in the stock market will ‘break a lot of hearts’. (link) Now, before we get to the task of dissecting this terrifying (and very effective) headline, I’d like to respond specifically to his concern and his proposed solution. Then we’ll get to the fun stuff. As a general practice, I like to start by reading the end of an article first then filling in the rest. That way I know where we’re headed and can put the body into proper context. Doing this allowed me to get the gist that the author isn’t terribly optimistic about the fate of US companies’ stocks in the foreseeable future. With this prediction having been made, he urges investors to remedy this by investing almost exclusively in emerging markets overseas in order to outpace the paltry US gains he’s predicting.

I say great, invest in some international stocks. Not with all of your portfolio, but having some of it in emerging markets certainly makes sense. And while buying the stocks of companies that reside overseas can make some sense, it’s important to note that most large US companies are automatically investing you in emerging markets as well because they do so much business internationally. For example, more than 50% of Ford’s revenue comes from overseas, Coca Cola is similar. Therefore, if the non-US emerging markets are where the growth is, you’ll get exposure to those markets through good old US company stocks alongside the international companies you may choose to own.

A nice benefit of investing in large US and international companies – rather than younger upstart companies – is the dividend stream that they produce. This stock dividend income plus the bond interest from a say, 60% stocks and 40% bonds mix, is currently pacing at roughly 4% annual income from the portfolio. That means that even if markets only produce 2-3% real growth, you’re already ahead of the author’s prediction just through the dividend and interest income you’re receiving. In other words, stock returns, whether they’re 2% annually for the next 20 years or 10%, are only a part of the story within a well-diversified retirement income plan.

Now let’s get to the headline; it reads, ‘Man credited with calling the 2008 crisis says…’.This headline is very well written and also very deceiving. It creates the illusion that a person who made one good call will get it right every time and therefore his commentary should be read as gospel. Never mind the many, many times the author predicted the next big decline only to miss out on years of market growth; they won’t mention that in the headline when competing for article clicks. I’ll add that I also predicted the 2008 crisis and communicated that to my clients and prospective clients in November of 2007 through a series of phone calls and emails. While I don’t suggest that I’ll ever make such a prediction again, there are a lot of us who saw what was coming in 2008 and 2009 and sounded the alarms, but choose to not tout it in order to gain media attention. I share this because trying to predict the markets for the next 20 years is a ridiculous thing to do; making such predictions gets headlines but is a trap. Can you imagine twenty years ago predicting the growth of the internet, the invention of the iPhone, and a world with electric cars buzzing by on almost every street now? Suggesting the US will slow down almost indefinitely and drag stock returns down with it also suggests that innovation will cease and we’ll only have what we’re stuck with right now. That’s a bet I certainly wouldn’t make.

So feel free to read those scary articles and use them to inspire further thought and conversation. To bury one’s head in the sand can lead to all sorts of other problems, so it pays to keep our eyes and ears open. I’m okay taking a cautious view of the future, yet I also think a well-built plan will have you well-positioned to benefit if it turns out better than the article suggests. But if it doesn’t, you still have a very nice income stream established that should allow you to meet and exceed your retirement objectives in all market seasons, not just the sunny days.

As always, send me your thoughts and questions. If there’s one prediction I can make confidently, it’s that we’ll see a lot of ups-and-downs going forward, so let’s just plan on that.

All the best,

Adam Cufr, RICP®