(from Jeff Sommer’s 11/16/18 New York Times Strategies column also published in the Sunday, 11/18/18 New York Times Print edition. Click here for the original post. Jeff writes Strategies, a column on markets, finance and the economy. He also edits business news. Previously, he was a national editor and served as foreign editor and an Asia/Eastern Europe correspondent at Newsweek. Follow Jeff on Twitter at @jeffsommer. Write to Jeff at firstname.lastname@example.org.)
The stock market has been plummeting and my own retirement portfolio has been shrinking.
Am I worried? Sure. But I’m still buying stocks.
Week after week lately, I’ve been stubbornly funneling part of my paycheck into diversified equity mutual funds in the hope of long-term gains, knowing full well that I’ve been losing money.
It’s not because I’m confident the market will start a big rally soon. I’m sticking with stocks precisely because I have no idea where the market is heading, and the statistics show that mistiming market rallies is excruciatingly costly. And I’m doing it out of faith in the future. Over the long run, the stock market has produced marvelous returns. I hope that will still be true, if I wait long enough.
The dangers of short-term investing are clear. A new, eye-opening study by Doug Peta, senior vice president of BCA Research in Montreal, points out the danger of trying to time a long bull market. Mr. Peta analyzed all previous United States bull markets — defined as an increase in the S&P 500 of at least 20 percent — from 1966 through 2007. He divided each of them into 10 equal chronological periods.
He found that by far the biggest returns have occurred at the very beginning and the very end of bull market runs.
What does this mean now? We don’t know how much time the bull market that started in March 2009 has left. If it is now late in its life, exiting early will hurt long-term portfolio returns. And if the bull market is just getting started, despite its advanced chronological age, staying on the sidelines will be even worse.
Long-term is the critical thought here. Based on history — admittedly, an imperfect guide — the market is highly likely to rise over extended periods, meaning stretches of at least 20 years.
The long-term returns have been fabulous over the last 40 years. From the end of October 1978 through October this year, the S&P 500 returned an annualized 11.8 percent, with dividends included, for a cumulative return of 8,679 percent. That’s 5.6 times the cumulative return of the Bloomberg Barclays U.S. Aggregate Total Return index, which tracks the bond market. A stock bonanza that large may not recur, but substantial, positive returns seem a reasonable long-term bet.
Still, I wish I were confident that the market will embark on an enriching, upward climb soon. That could happen: It often does in the autumn, especially after midterm elections, as I’ve written recently.
But in the current climate, stocks could easily fall much further. When the market is dropping, pouring more hard-earned cash into stocks may seem perverse. Why place $100 into the maw of a machine that reduces it to $93.16 in one month’s time?
That is, essentially, what the stock market did to investments in the S&P 500 index in October, the worst month for stocks in seven years. And that figure doesn’t include potential fees to investment houses, which can devour cash, even as your stake diminishes.
Despite a one-day bounce the day after the midterm elections, November so far has been a mediocre month for the market. I’ve been wincing as I examine my own portfolio, even though I’ve buffered my stock holdings with healthy allocations of bonds and cash.
What’s worse, some persuasive analysts marshal strong arguments that the main trend for stocks at the moment is downward. “There’s a good chance that the bull market is already over, that it ended in September, and that a bear market has begun,” said Doug Ramsey, the chief investment officer of the Leuthold Group in Minneapolis.
Rising interest rates are a disturbing portent for stocks, he noted, and they are climbing rapidly now. “The rate of change, not the absolute level of interest rates, is what drives the market, and the rate of change has been very high,” he said. It’s probably not a coincidence, he said, that the stock market ran into trouble in late September, just as bond yields were reaching new highs for the year.
Despite recent declines, Mr. Ramsey said, the American market is still overvalued. He calculated that stocks need to fall 25 percent below their Oct. 31 levels in order to reach their median valuations since 1970. Stocks outside the United States are about 10 percent underpriced compared with their historical valuations, he said, so there are better opportunities in market niches around the world.
But while Mr. Ramsey is concerned about American stocks, he says it makes sense for long-term investors to stick with them and stocks elsewhere, too, for the standard reasons. He can’t forecast short-term market returns accurately either, he said, and equities have provided superior returns over extended periods.
In a nutshell, he advises: “Ask yourself, what is the range of stock allocation you’re comfortable with? Once you’ve answered that, I’d reduce the stock in your portfolio to the lowest level that is within that range.”
What proportion of stock anyone should hold is a personal and contentious decision, one that I’ll return to. Mr. Ramsey said that older retirees should probably hold very little stock. For nearly everyone else, he puts the lower limit at about 30 percent of a portfolio that also includes bonds and cash, and the upper limit for stocks at about 70 percent, depending on market conditions. “I’d also be sure that I diversified internationally,” he said.
Since August 2017 I’ve recommended that investors make sure that they’ve rebalanced their own holdings, raising the proportion of bonds and perhaps cash, and reducing the stock portion in portfolios that have become too risky after a great bull market run. My mutual fund portfolio now contains 58 percent stocks, 27 percent bonds, with the rest in money market funds. That’s as conservative as I’ve been in a decade.
And with every paycheck, I’m funneling more money into stocks, while maintaining that rough portfolio allocation. It was much more pleasant when stocks were rising relentlessly. But I remind myself that even if stocks fall for a long while, I’ll be scooping up shares at cheaper prices. (Dollar-cost averaging is the fancy name for this kind of investing.) Eventually, if I wait long enough, low prices now will mean a bigger payoff later. That’s what I believe, anyway.
Because the financial future may not look anything like the past, this is an act of faith, based on history and hope. It’s not a sure thing — but if stocks weren’t risky, they wouldn’t return as much as they do.