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~Risk Posture~

Winter Mountaineering exposes climbers to various risks, some calculable and some incalculable. Calculable risks, like the probability of pursuing an unnavigable route or a slip and fall on steep terrain, can be managed with planning, conditioning, and technical advantage, while incalculable risks, like an avalanche or a crevasse fall, are largely unmanageable and must be accepted by the climber. Investing, like mountaineering, involves numerous proven hazards which must be identified and mitigated, as well as incalculable risks to be acknowledged and accepted. Is investing worth the risk? Why do great investors identify risk management as the indispensable component to successful investing? What are the considerations and methods of studious risk management? 

Famed investor, Doc Eifrig, of Stansberry Research, says “owning the stocks of profitable businesses is the greatest wealth building tool on earth”. Jim Rogers, Warren Buffet, and Jeff Besos would all agree. In a near-zero interest rate, high inflation world, the alternative to having, at minimum, a small amount of stock exposure, and, therefore, assuming the associated risk, is a large guaranteed annual loss in the purchasing power of all savings and investments, the only material measure of your financial worth! Yes, the risk of owning stocks is “worth it”, on certain terms.

Warren Buffet states the two most important rules of investing are 1) Never lose money, and 2) Never forget rule number one. Mr. Buffet strongly recommends that you assume risk, and that you dutifully manage that risk. Stanley Druckenmiller, Steve Sjuggerud, Howard Marks, and other legendary investors identify ‘the avoidance of a catastrophic loss’ as the single most important principle to investing. No mountaineer would disagree, and King Solomon, a wealthy man with much to lose, inferred as much in Ecclesiastes 11:2, when he said, “Give a portion to seven, or even to eight, for you know not what disaster may happen on earth”.

General means of risk management include the following:

  • Diversify equity holdings across multiple companies and sectors.

  • Dollar cost average into a diversified stock fund constantly.

  • Never over-pay for any security.

  • Keep leverage on your investments to a minimum.

 It should be understood investment return, and, therefore, risk of loss, is driven primarily by asset allocation (to investment types and industries), not security selection. Consider the following as you formulate your own ‘normal’ risk posture:

  • What resources do you have to meet future income needs?

  • How adequately will those resources meet the need, given conservative inflation and rate of return assumptions?

  • Where are you in the life cycle of inflows and outflows?

  • What aspirations do you have that involve spending?

  • What is your emotional ability to withstand market volatility?

   *Note that an investor’s risk posture should be based primarily on resources and financial status, not on emotions or sentiment, which, though factored in, must always be scrutinized, and often overruled.

Finally, once the ‘normal’ risk posture is ascertained, decide whether your allocation will remain in the ‘normal’ range throughout the various phases of the market cycle, or whether you will ‘lean’ in one direction (i.e.; offense) or another (i.e.; defense) as these market dynamics play out.¹   

In short, manage risk like a mountaineer! Think about it, Shaun.   

“For God gave us a spirit not of fear, but of power and love and self-control.” ~2Timothy 1:7

 

1 Oaktree, “Insights Live: Which Way Now? A Conversation with Howard Marks”, August 9, 2022 https://www.oaktreecapital.com/insights/insight-video/market-commentary/insights-live-which-way-now

The opinions voiced in this material are general, are not intended to provide specific recommendations, and do not necessarily reflect the views of LPL Financial. All investing involves risk including the possible loss of principle. No strategy ensures success or protects against loss.

Asset allocation does not ensure a profit or protect against loss. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.

Dollar cost averaging involves continuous investment in securities regardless of fluctuation in price and does not guarantee a profit or against loss of principal.

 

 

     

  

https://www.fivestarprofessional.com/spotlights/90982

Award based on 10 objective criteria associated with providing quality services to clients such as credentials, experience, and assets under management among other factors. Wealth managers do not pay a fee to be considered or placed on the final list of 2012/2022 Five Star Wealth Managers.

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Powell’s Fairytale Misleads ‘Still-Frothy’ Market

I used to love telling scary ‘bear stories’ to my young and gullible nephews while camping in the woods behind our home, and would often inconspicuously loft rocks into the brush for effect. Jerome Powell is a gifted storyteller; already confounded once by the resiliency of ‘40 year high’ price inflation, Powell is now counting his chickens before they hatch, and so far, Wall Street foolishly believes the fairytale. What comments did the Fed Chair make yesterday which constitute wishful thinking? Why didn’t the bond market buy it? What reveals the spirit of speculation remains in the stock market? What should you do about it?

In yesterday’s FOMC press conference, Chairman Powell said he doesn’t believe the U.S. economy is in recession, doesn’t believe a recession is necessary to bring inflation back into the Fed’s desired range, and future rate hikes will be determined based on monthly data.¹ Powell’s statements suggest the Fed will bring its key short-term lending rate to 3.25%-3.5% by year end, that this series of hikes will be sufficient to tame inflation within months, and that it won’t even require economic contraction. Wow, what a wonderful story! Stock investors cheered the news with a binge-shop, driving the S&P 500 3% higher for the day.²  

No bear ever inhabited the back woods in the days of my storytelling, but convincing my nephews of that fact was nearly impossible once the rocks started landing. It’s likely to require more pain for stock investors to sober up from their excesses of the last decade, and receive Powell’s testimony as the wild notion that it is. How can a man who creates inflation for a living, and yet can’t differentiate between relatively harmless, transient inflation and life-threatening, resilient inflation, have such rare insight into the complex relationship between inflation, interest rates, and the world’s largest economy, while battling a global supply crunch, de-globalization, and war? How can a more indebted U.S. economy than in 2018 handle rates higher than were required to send the financial markets into turmoil that year? Powell didn’t answer these two important questions.

The 10 Year Treasury yield closed down modestly yesterday, while key components of the yield curve remain inverted. An inverted yield curve is the most accurate indication of an oncoming recession, bragging a near perfect track record over the past half century. While sober bond investors were unamused by Powell’s story, frolicky stock investors bid up the prices of profitless, dividend-less growth stocks, suggesting too much stimulus-driven stupor remains on Wall Street, given the hawkish environment we are now in.

In closing, what we know is, 1) we are in a bear market, 2) the fed is aggressively tightening policy, 3) inflation is high, and 4) the unintended consequences of higher interest rates are unknown. Build investable cash, dollar cost average the whole market cycle, stay diversified, favor present streams of income over speculation, favor businesses with pricing power over those with growth potential, and most importantly, watch the storyteller’s actions while listening to his words, it would’ve saved my nephews a great deal of anguish!                  

Think about it, Shaun.   

 

“The last duty of a central banker is to tell the public the truth.”

~Alan Binder, Federal Reserve Board Vice Chairman

“The Federal Reserve is not currently forecasting a recession.”

~Ben Bernanke, Fed Chairman, January, 2008

 

1 CNBC, “Full recap of the Federal Reserve’s rate hike and Powell’s market-boosting comments”, July 27, 2022

https://www.cnbc.com/2022/07/27/real-time-updates-of-the-feds-big-rate-decision-and-powells-press-conference.html

2 Yahoo Finance, S&P 500, July 27, 2022 at 4pm

https://finance.yahoo.com/

 

The opinions voiced in this material are general, are not intended to provide specific recommendations, and do not necessarily reflect the views of LPL Financial. The economic forecasts set forth in this commentary may not develop as predicted.

All investing involves risk including the possible loss of principle. No strategy insures success or protects against loss. Dividend payments are not guaranteed and may be reduced or eliminated at any time by the company.

Dollar cost averaging involves continuous investment in securities regardless of fluctuation in price.

 

 

     

  

https://www.fivestarprofessional.com/spotlights/90982

Award based on 10 objective criteria associated with providing quality services to clients such as credentials, experience, and assets under management among other factors. Wealth managers do not pay a fee to be considered or placed on the final list of 2012/2022 Five Star Wealth Managers.

Shaun Scott No Comments

Inflation-Taming Budget Strategies

Financial success, or exemplary stewardship, involves both earning money, and the judicious appropriation of those earnings. Astute budgeting is the indispensable ingredient to financial success for both families and businesses, and high inflation magnifies its value, as well as the consequences to those who neglect it. What strategies can you employ on both the income and expense sides of your own budget to tame inflation and thrive in the ongoing stagflationary environment?

Frugality can’t help us if we have no income; successful budgeting requires earning money. Regarding this half of the budget, consider the following:

  • Develop a strong work ethic. There is no substitute, and it will give you an advantage in the workplace, but don’t be a workaholic.

  • Trade up. Be aware of opportunities for career advancement, and use it as leverage in your present job. Never relinquish your job before securing subsequent employment.

  • Continuously advance your skillset, and specialization in your field. Make sure there’s opportunity for this before accepting a position.  

  • Strive for excellence in your daily work, for “a man skilled in his work will serve before kings” (Proverbs 22:29).

  • Be creative to find alternative income opportunities. Consider the Charter Economy.

  • Don’t retire too early. Big financial implications exist, but work also brings balance and purpose to the years of our strength.

The second half of the budget is the more neglected, and frivolous discretionary spending in a high inflation environment is consequential. Develop the following spending disciplines:

  • Know where your money is going. Identify every expense, and categorize each as either fixed or discretionary.

  • Minimize fixed expenses with militant comparison shopping. Obtain multiple quotes on all large purchases. Minimize discretionary spending by learning to go without.

  • Eradicate impulsive spending. Never buy under sales pressure. Never carry consumer credit balances.

  • Have a plan to become debt free. Never retire while in debt. Make sure your debt is invested with “net productivity” (of interest). Treat your debt like a pet scorpion: beat it into submission, starve it, and don’t feel bad if you terminate it!

  • Carry emergency savings (equal to 9 months annual household expenses) to negate ‘budget disruptions’.

  • Scrutinize off budget spending ruthlessly. Realize less spending carries the same weight as more income.

Every budget must achieve a ‘net positive cash flow’, meaning, after tax income must exceed gross spending. Once there, consider the following to bring balance and perspective to your financial life:

  • Give generously, especially to those who can’t pay you back. Money can’t own those refusing to place too high a value on it.

  • Thoroughly enjoy a periodic vacation to recharge your batteries. Enjoy the fruits of your labor, and the blessing of your talents and employment.

  • Invest for the future, for you may not always be able to work. “A wise man leaves an inheritance to his children’s children” (Proverbs 13:22).

Think about it, Shaun. 

“God loves a cheerful giver” ~2Corinthians 9:7

 

The opinions voiced in this material are general, are not intended to provide specific recommendations, and do not necessarily reflect the views of LPL Financial. The economic forecasts set forth in this commentary may not develop as predicted.

All investing involves risk including the possible loss of principle. No strategy insures success or protects against loss. Dividend payments are not guaranteed and may be reduced or eliminated at any time by the company.

Dollar cost averaging involves continuous investment in securities regardless of fluctuation in price.

 

 

 

 

     

  

https://www.fivestarprofessional.com/spotlights/90982

Award based on 10 objective criteria associated with providing quality services to clients such as credentials, experience, and assets under management among other factors. Wealth managers do not pay a fee to be considered or placed on the final list of 2012/2022 Five Star Wealth Managers.

Shaun Scott No Comments

Surviving the Stagflationary Storm

To survive a threatening winter storm above tree-line, mountaineers must think, stay hydrated and fueled, keep the core temperature stable, avoid injury, and chart a course to expediently descend the mountain. The storm doesn’t care what a great climber you are; the neglect of any of these things may get you killed. Execution is all that matters. The ongoing stagflationary storm is punishing asset prices, devouring incomes, and threatening the economy with recession; it is equally hazardous! The 1967 “deadliest ever” storm on Denali lasted over a week and claimed seven lives of a party of twelve experienced mountaineers. Astonishingly, five starved or froze cowering in a snow cave or tent. Consider the following actions to survive what may eventually be renamed, “The Great Stagflation of the 2020’s”:

  • Maintain a net positive cash flow by working hard, by improving earning potential with increased specialization in your field, and with the strictest budgeting of your life.

  • Dollar cost average into long-term investment accounts throughout the market cycle, at minimum until the next bull market is underway.

  • Minimize inflationary damage to cash savings by seeking a higher fixed interest rate in alternative products. Abandon the ‘bank only’ bias that feasts on the purchasing power of your savings.

  • Beware the risk to low quality and long duration bonds from both rising interest rates and a weakening economy. Understand your exposure to the bond bubble, particularly with target date, balanced, and asset allocation ETF’s and mutual funds.

  • Think outside your normal box to find high quality investments with significant, present income streams, especially those able to pass price increases on to consumers.

  • Beware the inflationary risk to all growth stocks, as they promise a future dividend already being consumed by inflation. If you own them, take a long-term approach and toughen up.

  • Understand the investing environment has changed. “Buy the dip” growth investors have been taken to the woodshed, and “Don’t fight the Fed” realists are surviving. The Fed is in full panic mode and is not likely to revert to the printing press, its primary trick, until there is significantly more pain in the stock market and economy.

  • Build portfolio cash to take advantage of low stock multiples when the Fed does try to cure the pain with the very thing that caused it, a near certainty in due course.

Think about it, Shaun.   

“The Fed, in the disposition of its experimental policies, performs as both arsonist and firefighter” ~Jim Grant

“Inflation is taxation without legislation.” ~Milton Friedman

 

The opinions voiced in this material are general, are not intended to provide specific recommendations, and do not necessarily reflect the views of LPL Financial. The economic forecasts set forth in this commentary may not develop as predicted.

All investing involves risk including the possible loss of principle. No strategy insures success or protects against loss. Dividend payments are not guaranteed and may be reduced or eliminated at any time by the company.

Dollar cost averaging involves continuous investment in securities regardless of fluctuation in price.

 

 

     

  

https://www.fivestarprofessional.com/spotlights/90982

Award based on 10 objective criteria associated with providing quality services to clients such as credentials, experience, and assets under management among other factors. Wealth managers do not pay a fee to be considered or placed on the final list of 2012/2022 Five Star Wealth Managers.

Shaun Scott No Comments

Inflation’s Two Most Probable Paths

Three weather systems converge at the summit of Mt. Washington in New Hampshire, a weather phenomenon meteorologists refer as “The Vortex”, producing one of the windiest places on planet earth. The Mt. Washington Observatory (MWO) confirms this violent swirl produces wind speeds exceeding 100 MPH on average every week in winter, reliably presenting climbers venturing above tree-line with one of two weather scenarios: uncomfortably windy, and life-threateningly windy. Similarly, and also the result of three converging catalysts, American workers and investors in the coming decade will likely contend with one of two inflation scenarios: uncomfortable inflation, and life-threatening inflation. What are the three catalysts indicating the high probability of this outlook? What dependable gauge will soonest reveal inflation’s prevailing path? What are the implications of each to the financial markets?

It’s extraordinarily fun to spend other people’s money, but when central bankers expand the money supply at a rate exceeding economic growth, the seeds of price inflation are sown. Money-printing is the sole, indispensable cause of all inflation. While ‘The Vortex’ creates an environment conducive to high winds, specific storms trigger extreme wind velocity. The Covid19 lockdown directly resulted in producers and distributors of essential products shutting down unused facilities, disrupting the global supply chain on an unprecedented scale. The resulting supply constraints triggered the highest price inflation in 40 years. Humans are fascinating beings. As King David said, “fearfully and wonderfully have I been made” (Psalm 139:14). The behavior of groups of humans, however, as proven throughout history, is often illogical, unpredictable, and destructive, and when inflation factors into the behavior of the average consumer, the ingredients of lasting inflation have been mixed.

MWO issues Winter Storm Warnings to alert climbers of life-threatening conditions above tree-line. Many notable investors consider the yield on the 10Year Treasury bond to be the world’s most accurate economic forecaster today. Recently subverting its own 35 year downtrend line, it suggests price inflation is entrenched, and warns that America’s mid-term inflation outlook ranges from uncomfortable to potentially life-threatening.

Scenario 1: inflation moderates, causing the economy to weaken, causing the 10 Year yield to decline, allowing ‘the Fed’ to slow its aggressive tightening plans. Stocks and the economy struggle until the Fed pivots to the next “easing” cycle, at which time both stabilize and begin their respective growth cycles.

Scenario 2: inflation remains elevated near present levels or grinds higher, bringing the 10 Year yield with it, forcing ‘the Fed’ to continue tightening even as market stress elevates and the economy further weakens. This continues until a sovereign debt crisis occurs, causing ‘the Fed’ to lower rates in a high inflation environment, which would further accelerate inflation, causing unexpected and potentially devastating consequences to the stock market and economy. ¹

Climbers survive New Hampshire’s life-threatening winter winds by thinking critically and acting decisively. The present inflation is worthy of both. Think about it, Shaun.   

“The wise sees trouble coming and hides himself, but the simple go on and suffer for it.” Proverbs 27:12” ~Proverbs 27:12

1 Inside TRADESMITH, by Justin Brill, “This Is the Worst Case Scenario for Stocks”, June 14, 2022

The opinions voiced in this material are general, are not intended to provide specific recommendations, and do not necessarily reflect the views of LPL Financial. The economic forecasts set forth in this commentary may not develop as predicted.

 

     

  

https://www.fivestarprofessional.com/spotlights/90982

Award based on 10 objective criteria associated with providing quality services to clients such as credentials, experience, and assets under management among other factors. Wealth managers do not pay a fee to be considered or placed on the final list of 2012/2022 Five Star Wealth Managers.

Shaun Scott No Comments

Inflation Report Renounces Powell’s “Transience” Fable

The great thing about hiring a professional guide on a big mountain expedition is the guide goes with you, and is even tied to the same rope. Subterfuge is of no use to the mountain guide, as their own life is dependent on the counsel they give. Central bankers are none the sort, yet have garnered sufficient investor confidence to in many instances replace actionable policy with mere words, words the market refers to as ‘guidance’, guidance the bankers know does not represent a dispensation of truth, but a ploy aimed at impacting consumer and investor behavior. How did Friday’s inflation report reveal exactly this of Jerome Powell’s recent “transient inflation” myth, how will the development impact your family, and what should you do about it?

Fed Chair Powell is of the same mold as former Chair Ben Bernanke, who on the eve of The Great Recession told Congress he saw “no recession coming”,¹ and Chair Janet Yellen, who in 2017, when a higher percentage of U.S. companies were considered to be ‘Zombie Corporations’ than at any time in U.S. history, said she did not believe there would be another financial crisis in her lifetime.² Powell followed the dissimulation of his predecessors in 2021 by declaring without basis and for many months that inflation was “transitory”, only to be forced to shamefully retire the term in December by resiliently high levels of price increases.³ The 10 Year Treasury yield, considered by many astute investors to be the best economic indicator in the world today, has broken above the 35 year downtrend line,⁴ and is warning high price inflation is entrenched.

Friday’s CPI release for May shocked Wall Street, now in a major selloff, by beating expectations to the upside with yet another “highest in 40 years” release. Though declining consumer discretionary spending is causing price inflation in that arena to moderate, it offers consumers and investors little comfort since price increases in the food, energy, and housing sectors continue to run hot. This means more of everyone’s income will be absorbed by these universally needed items, leaving less disposable income for everything else.

Critical solutions include strict budgeting, gaining skills to maintain your own home and property, planning gas-use carefully, enjoying life’s free pleasures, being part of a group of independent and like-minded people, growing a vegetable garden, and working both smart and hard. If there is a blessing in this rampant price inflation, it’s that it is presently driven by supply constraints and war, and not by a widespread loss of confidence in our currency, a far more destructive phenomenon.

Think about it, Shaun.   

 “By a continuing process of inflation, government can confiscate, secretly and unobserved, an important part of the wealth of their citizens.” ~John Maynard Keynes

1 NPR, “Bernanke Sees No Recession, but Big Challenge”, February 27, 2008 https://www.npr.org/2008/02/27/74992288/bernanke-sees-no-recession-but-big-challenge#:~:text=Bernanke%20Sees%20No%20Recession%2C%20but%20Big%20Challenge%20Visiting%20Congress%20to,keeping%20a%20lid%20on%20inflation

2 Reuters, “Fed’s Yellen expects no new financial crisis in ‘our lifetimes”, June 27, 2017 https://www.reuters.com/article/us-usa-fed-yellen/feds-yellen-expects-no-new-financial-crisis-in-our-lifetimes-idUSKBN19I2I5

3 Bloomberg, “Powell’s ‘Transitory’ Retreat is Just the Beginning”, December 21, 2021 https://www.bloomberg.com/opinion/articles/2021-12-01/powell-s-transitory-mistake-on-inflation-risks-destabilizing-markets

4 US Department of the Treasury, Daily Treasury Par Yield Curve Rates, June 13, 2022 https://home.treasury.gov/resource-center/data-chart-center/interest-rates/TextView?type=daily_treasury_yield_curve&field_tdr_date_value_month=202206

The opinions voiced in this material are general, are not intended to provide specific recommendations, and do not necessarily reflect the views of LPL Financial. The economic forecasts set forth in this commentary may not develop as predicted.

 

 

     

  

https://www.fivestarprofessional.com/spotlights/90982

Award based on 10 objective criteria associated with providing quality services to clients such as credentials, experience, and assets under management among other factors. Wealth managers do not pay a fee to be considered or placed on the final list of 2012/2022 Five Star Wealth Managers.

Shaun Scott No Comments

Timeless Financial Principles for Methodical Wealth Production

Winter mountaineering is considered by most, including life insurance underwriters, to be an extremely dangerous sport, but the fact is the vast majority of risks on the mountain are calculable, hence, when managed dutifully, the sport can be enjoyed with reasonable safety into a climber’s elder years, and often is. Accumulating wealth is in this respect analogous to winter mountaineering, also fraught with life-threatening, but mostly calculable risks, and when approached with the consistent application of time-tested financial principles, offers the diligent an extraordinarily high probability of success.

While climbing big winter mountains is never easy, it’s rarely complicated. Proper gear and supplies, conditioning, competence, navigation skills, and the poise to think, and not panic, in emergencies, together dependably subdue calculable risks. The principles for wealth production are similar:

  • Build on the foundation of adequate emergency savings (equivalent of 9 months expenses), a specific plan to become debt free (at least by retirement), and the right amount of the right type of life insurance.

  • Establish, and then maximize, a net positive monthly cash flow (net income exceeds gross expenses) by working hard and improving earning capacity with specialized education in your field, and by minimizing expenses with strict budgeting.

  • Allocate investable dollars appropriately, and separately, for each financial goal, in amounts consistent with your priorities. Have a formal and actionable financial plan.

  • Dollar cost average towards all long-term goals.

  • Diversify holdings in each investment account across multiple industries and sectors to mitigate the risk of a large loss scenario.

  • Major in income producing securities and funds.

  • Minor in non-income producing, speculative growth opportunities.

  • Invest in things you understand.

  • Diversify income sources, and again, put capital behind ventures you understand.

  • Enjoy the fruits of your labor and receive refreshment by periodically abstaining from work.

  • Bless others by sharing these principles with them, and by giving to those in need.

 The goal of mountaineering should never be to summit; summiting is a gift, but enjoying the climb and being invigorated and inspired is essential. Enjoy the path these principles will place you on, and share your journey with others. Think about it, Shaun.   

 

“Well done, good and faithful servant. You have been faithful over a little; I will set you over much” ~Matthew 25:23

 

 The opinions voiced in this material are general, are not intended to provide specific recommendations, and do not necessarily reflect the views of LPL Financial. The economic forecasts set forth in this commentary may not develop as predicted.

 All investing involves risk including the possible loss of principle. No strategy insures success or protects against loss.

 Asset allocation does not ensure a profit or protect against loss. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.

 Dollar cost averaging involves continuous investment in securities regardless of fluctuation in price.

 

 

 

     

  

https://www.fivestarprofessional.com/spotlights/90982

Award based on 10 objective criteria associated with providing quality services to clients such as credentials, experience, and assets under management among other factors. Wealth managers do not pay a fee to be considered or placed on the final list of 2012/2022 Five Star Wealth Managers.

Shaun Scott No Comments

The 3 Stages of a Bear Market

Slip-and-falls on steep terrain are far and away the number one killer of high mountain climbers, and interestingly, the vast majority of these falls occur on the descent, the part most would describe as the easy half. It’s easy for a climber to die on the way down, for the whole process lends itself to this outcome, and it’s just as easy for investors to financially perish in a bear (down) market, equally supportive of the tragedy. The S&P 500, the most representative index of the U.S. stock market, stands on the precipice of a bear market today. What is a bear market, and what are its identifying characteristics? What mistakes does it exploit, and how can you avoid making one?

A bear market is most generally defined as a 20% decline from the recent high mark. Year to date, the NASDAQ is down 30%, the S&P500 is down 19%, and the Dow Jones is down 15%; the strong indication is we are in the beginning of a major bear market.

As described in Bob Farrell’s 10 Rules of Investing, the three stages of the bear market are as follows:

  • Sharp down

  • Reflexive Rebound

  • Drawn-out fundamental downtrend

The ‘sharp down’ stage has clearly already occurred, and given the S&P 500’s 11% recovery, and the Nasdaq’s 16% recovery, from March 14 to March 29,² maybe the ‘reflexive rebound’ stage has as well. This means several things about the stock market today: investors are still too optimistic about stocks in the short-term, the worst is likely yet to come, and a ‘drawn-out fundamental downtrend’ likely lies ahead.

Whether this is ‘officially’ a bear market remains to be seen, but if it is, the following mistakes will likely prove deadly for investors:

  • Buying aggressively into the peak (late last year, at price levels that may not be seen again for a decade or more).

  • Allocating the overall portfolio too aggressively at a major market peak (again, late last year; returns are most attributable to portfolio allocation, not security selection. Fidelity went public in the last year saying its customers were far too risky for their own well-being).

  • Overconcentration (too much exposure to a small number of holdings; too little real diversification; too much correlation among holdings).

  • Capitulating at the bottom of the bear market (selling indiscriminately at the market bottom to stop the pain).

Easy to comprehend, hard to practice methods of avoiding the aforementioned mistakes include:

  • Buy great businesses whenever they trade at a reasonable price.

  • Know yourself as an investor, be well acquainted with your tolerance for volatility, and appropriate your investment capital in a manner consistent with these two things.

  • Diversify holdings to mitigate a large loss scenario.

  • Understand the investing environment, and the types of investments and industries that thrive in that environment. Investors generally associate deflation with a bear market, yet those who do so this time will be sifted by rapidly rising prices.

  • Stick to your bear market plan, and regarding high quality holdings, slay your emotions to avoid selling them at depressed prices.

  • Build cash, wait for broad capitulation, and pray for wisdom and courage to buy great stocks when others are fearful.    

 Think about it, Shaun.   

“It’s better to buy a great company at a fair price than a fair company at a great price” ~Warren Buffet

1,2 Yahoo Finance, May 20, 2022 https://finance.yahoo.com/

 

The opinions voiced in this material are general, are not intended to provide specific recommendations, and do not necessarily reflect the views of LPL Financial. The economic forecasts set forth in this commentary may not develop as predicted.

 All investing involves risk including the possible loss of principle. No strategy insures success or protects against loss.

 Asset allocation does not ensure a profit or protect against loss. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.

 

 

 

     

  

https://www.fivestarprofessional.com/spotlights/90982

Award based on 10 objective criteria associated with providing quality services to clients such as credentials, experience, and assets under management among other factors. Wealth managers do not pay a fee to be considered or placed on the final list of 2012/2022 Five Star Wealth Managers.

Shaun Scott No Comments

~Stagflation~

Significant preparations are made for bad weather scenarios when planning a big mountain expedition, but when the battering begins, it’s instantly clear to the mountaineer the time for planning is over; carrying out well-laid plans is suddenly essential for survival. Stagflation is as dangerous to the financial lives of savers and investors as are high mountain storms to the physical lives of mountaineers. The fact it kills more slowly allows for posture adjustments even after its arrival, unlike most mountain storms, and this is an important distinction, since stagflation is already here.

Stagflation is a portmanteau combining the words stagnation and inflation. It depicts an economy with little or no growth, high unemployment, and high inflation.¹ Last week’s newsprint of a 1.4% contraction in GDP confirms the U.S. economy is weak,² and the suddenly plummeting yield on the 10 Year Treasury bond seems to be confirming it. ‘Official’ Unemployment was recorded at just 3.6% in April,³ painting a rosy, but wildly inaccurate picture of America’s employment market. The far more revealing Labor Participation Rate, presently at a 45 year low (outside the Covid19 lockdown), proves real unemployment is an exponentially higher number. This week April inflation came in at 8.3%, the second consecutive “highest in 40 years” reading.⁴ No mountaineer would ever doubt the arrival of a deadly storm; though stagflation is more difficult to perceive, the above facts confirm it is here.   

Given ‘the Fed’ now has to simultaneously fight a weak economy and high inflation, the following threats to savers and investors are escalated:

  • High probability of a near-term Bear Market in stocks

  • High volatility in the financial markets

  • High probability of a near-term recession

  • Higher probability of additional critical policy errors by ‘the Fed’

  • The systematic vaporization of cash savings by inflation

  • Economic and social disruptions due to ongoing supply problems

Final preparations might include:

  • If retired, have the equivalent of 5+ years of withdrawals in cash

  • If working, think twice before relinquishing earned income

  • Properly diversify your investments to mitigate the risk of a catastrophic loss.

  • Have a long-term mindset towards quality holdings, and ruthlessly beat your emotions into subservience with a stick, then slay them.

  • Tighten your budget, eradicate impulse spending, and payoff your consumer debt.

  • Watch less TV; instead, gain and use valuable skills to replace high expense budget items.

  • Exercise in the sun, create a restful bedroom atmosphere, and graze on healthy foods to minimize future health-related expenses.

  • Be thankful for what you have, and share some of the excess with those who can’t pay you back, then quickly forget all about it.

Think about it, Shaun.   

 

“The prudent sees danger and hides himself, but the simple go on and suffer for it.” ~Proverbs 27:12

 “God loves a cheerful giver.” ~2Corinthians 9:7

 “A good man leaves an inheritance to his children’s children.” ~Proverbs 13:22

1 The Balance, “What is Stagflation?”, by Kimberly Amadeo, October 29, 2021

https://www.thebalance.com/what-is-stagflation-3305964

2 USA Today, “Economy contracts first time since 2020 in first quarter as GDP falls 1.4%”, April 28, 2022

https://www.usatoday.com/story/money/2022/04/28/us-economy-growth-first-quarter/9562730002/

3 Trading Economics, US Unemployment Rate

https://tradingeconomics.com/united-states/unemployment-rate

4 Yahoo Finance, “Inflation decelerates slightly from 40-year high as CPI rises 8.3% in April”, May 11, 2022

https://finance.yahoo.com/news/inflation-consumer-price-index-cpi-usa-april-2022-123135066.html

The opinions voiced in this material are general, are not intended to provide specific recommendations, and do not necessarily reflect the views of LPL Financial. The economic forecasts set forth in this commentary may not develop as predicted.

 All investing involves risk including the possible loss of principle. No strategy insures success or protects against loss.

 Asset allocation does not ensure a profit or protect against loss. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.

 

 

 

 

     

  

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