Shaun Scott No Comments

Challenges and Solutions for a 2020’s Retirement

Retirement planning and income investing professional, David “Doc” Eifrig, of Stansberry Research, has been warning near-term retirees, “The deck is stacked against you”.¹ What are the converging hazards to the planned ‘2020’s retirement’, and what solutions may avert disaster?

Many retirees dread the humiliation of running out of money and having to return to work or move in with their kids late in life, yet according to The World Economic Forum, most retired Americans will outlive savings by an average of 8-10 years.²  Converting to an exclusively unearned income while in debt, failure to accumulate sufficient retirement capital, neglecting to factor inflation into the planning, and loose spending in early retirement years are common pitfalls retirees stumble into, but various external threats are now aligned to endanger even those avoiding the common hazards.

The greatest threats to a planned retirement in the next few years are:

  • High Inflation. How can retirees overcome higher than expected expenses without earned income? The indications are high inflation is here to stay, and its potential damage is unlimited.

  • High costs for Long Term Care present the second most threatening financial risk, particularly for the independent spouse.

  • Tax hikes are a mathematical certainty following an era of reckless government spending, and are the end goal of the coming issuance of a central bank digital currency (CBDC).

  • Financial planners using Monte Carlo Simulation understand how devastating an early retirement bear market can be to a retiree’s drawdown rate, yet a significant bear market may be lurking.

  • Negative real interest rates neuter fixed income yields and force retirees into riskier securities to battle the aforementioned threats. This magnifies the effect of an early retirement bear market, which can alone decimate even the best-laid plans.

The most effective solutions for these perils include:

  • A net positive cash flow (net income exceeds total living expenses) is most critical at all times. It is achieved by frugality, fiscal discipline, and various passive income sources (like rental, charter-economy, or increasing annuity income).

  • Avoid big voluntary outlays in retirement. Buying homes and making loans to children can do quick, irreversible damage to your retirement. Do these things before relinquishing earned income.

  • Learning to maintain your home can save thousands annually.

  • Buying certified, pre-owned vehicles saves thousands on every purchase.  

  • Mitigate catastrophic risks. Married couples in the upper-middle class should have some Long-Term Care protection. Avoid being caught with a high percentage of your retirement capital in ‘yet to be taxed’ accounts. Avoid excessive cash savings and own ‘dividend aristocrat’ stocks to fight inflation. Have an exit plan on equity trades to offset the bear market.

  • Have an ample emergency fund for unexpected bills, but quickly replenish it from the positive cash flow following outlays.

  • Consider whether a tiny investment of your retirement capital in mega-technology trends, like those mentioned here, would be appropriate.

  • If you are blessed with sufficient retirement cash flow, dollar cost average into a great stock fund for the first dozen years of your retirement, to help pay for the second dozen years of your retirement.

  • Be thankful for your success, and generous with others in need!

Think about it, and I hope these suggestions are a blessing to you. Shaun

“Give a portion to seven, or even to eight, for you know not what disaster may happen on earth.” ~Ecclesiastes 11:2

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

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

1 Daily Wealth Premium, by David “Doc” Eifrig, “Conventional Wisdom Won’t Save Your Retirement”, October 1, 2021

2 Daily Wealth Premium, by David “Doc” Eifrig, “Don’t Fall Into The Retirement Nightmare”, September 3, 2021

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 levels of such securities. An investor should consider their ability to continue purchasing through fluctuating price levels. Such a plan does not assure a profit and does not protect against loss in declining markets.

Investing in mutual funds involves risk, including possible loss of principal. Fund value will fluctuate with market conditions, and it may not achieve its investment objective.

Shaun Scott No Comments

Solutions to the Dilemma of Rising Prices

The ongoing debate over whether the recent surge in prices will be ‘transitory’ or ‘lasting’ has quieted, as price-hikes persist with no end in sight. The cost of living in America is presently increasing at over 8% annually, based on the U.S. government’s own 1990-based formula.1 Meanwhile, Trish Regan, of American Consequences, reports inflation-adjusted wages are down 1.2% in the same period.2 This divergent trend won’t have to last long to pinch a large swath of middle class Americans with little or no savings. What caused the sudden inflationary surge, what will alleviate it, and what solutions can help working Americans survive it?

While an arbitrary increase in the money supply is the primary impetus for rising prices, there are other catalysts. Supply chain disruptions caused by the Covid19 lockdown and sudden economic re-opening is causing consumers to pay more and wait longer for virtually all imported goods. Loaded container ships sit idle outside major ports due to vaccine mandate regulations and a shortage of workers, both issues affecting prices. A shortage of container ships causes further delay, and many return to China empty or slightly loaded, the natural result of America’s exported manufacturing industry. It’s notable the USA/China trade imbalance, roused by the Trump Trade War, is inspiring China to seek new trading partners. Dependence on a less interested supplier is bad enough, but China also controls the global supply chain for raw materials, from which everything is made, and commodity prices are rising noticeably.

A return to free market-based interest rates would expediently correct the rising price problem, as Paul Volker demonstrated, but with the U.S. government, numerous municipalities, and 25% of all corporations in the U.S. burdened by an excessive debt load, don’t count on the Fed allowing it. Setting a limit on the creation of new currency units that is consistent with economic growth would kill the life-blood of rising prices, but due to the fact it would set interest rates ablaze, we must also rule it out. Absent the moral courage to enact these solutions, price increases are likely here to stay, which means we must find our own solutions.

These are some ways to fight price increases:

  • Maximize positive cash flow by running a tight family budget, then save & invest more to pay for tomorrow’s higher prices

  • Consider The Alpha Strategy for all purchases (contact the office for a free e-copy)

  • Don’t relinquish earned income without serious consideration

  • Avoid big positions in low or non-income producing investments, like cash and speculative growth stocks

  • Focus on income and dividend investments, especially those able to raise prices with inflation, and are capital efficient

  • Own some inflation hedges (REIT’s, MLP’s, commodities, gold)

  • Consider utilizing the Charter Economy

Think about it. Shaun

“A nickel ain’t worth a dime anymore” ~Yogi Berra

“You shall do no wrong in judgment, in measures of length or weight or quantity.” Leviticus 19:35

1 John Williams’ Shadow Government Statistics, Inflation 1990-Based, 10/14/2021

http://www.shadowstats.com/alternate_data/inflation-charts

2 American Consequences, “The Incredible Shrinking Dollar”, 10/13/2021

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.

Shaun Scott No Comments

Embrace the Emerging Charter Economy

The Fed’s policy of perpetual dollar debasement makes it increasingly difficult for common folks to put food on the table, but new technologies present valuable solutions for the nimble. Consider the charter economy, and how it can help your family solve the dilemma of rising costs.

The charter economy is simply a “sharing” economy in which useful possessions are “rented” to others when not in use. Americans pay high real estate taxes on basements and garages, and then fill them with depreciating, non-income producing accoutrements, like cars, lawn mowers, and generators, which in most cases rarely get used. Your family is a micro economy, and this is an inefficient use of your God-given capital!

The charter economy is mutually beneficial, which means it’ll save you money when you smartly rent an item instead of buying it, and it’ll make you money when you rent an “in-demand possession” instead of storing it. This new sharing economy is booming, in part because modern technologies have solved the former hindrances of a) finding a willing lender and renter, b) negotiating a fair price, c) making payment, and d) trusting associated parties. Choose a well-established vendor with many users, lots of favorable reviews, and a strong insurance policy (for protection from damage, theft, or injury). Reputable sites include, but are not limited to, Airbnb, VRBO, Turo, Neighbor, StyleLend, Fat Llama, Spinlister, RVshare, and Boatsetter.1

The most practical and profitable “not-in-use” items to rent include homes, cars, storage space, parking spaces, tools, bikes, snowboards, skis, surfboards, paddleboards, kayaks, RV’s, and boats. Neighbor’s site has a calculator to provide estimated income amounts on various items, and other free calculators can be found online. My own recent search for a rental garage on Aquidneck Island revealed there is zero supply available, and the going rate for a secure 12×24 space is north of $300/month!

Rules for success in the charter economy include:

1) Provide high quality photos and descriptions. When placing an ad, use clear, well-lit photos which accentuate the intended use. If renting storage space, for example, the picture should reveal the whole space, which should be clean, empty, and inviting. Offer a very detailed description of your products.

2) Treat it like a business. People want to deal with professionals, so be punctual, courteous, and kind, and offer a fair price.

3) Focus on products that are in high demand.

4) Post and encourage reviews, the more the merrier!

5) Make sure you are protected.2

Remember to appreciate and enjoy the God-given new relationships the charter economy will send your way! Shaun

“Do not lay up for yourselves treasures on earth, where moth and rust destroy and where thieves break in and steal, but lay up for yourselves treasures in heaven, where neither moth nor rust destroys and where thieves do not break in and steal.” ~Matthew 6:19-20

1,2 Retirement Millionaire, “Charter Income: America’s No. 1 Income Strategy for 2020”, August 21, 2020

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.

Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services. LPL does not provide research on individual equities.

Shaun Scott No Comments

Today’s Disruptive Global Economic Trends

Disruptive trends are in place in the world today which are changing the social and economic experience for virtually all people everywhere. This week let’s identify a few of these primary shifts in mass behavior, not to judge the moral integrity or economic feasibility of these developments, for a sufficient number of policymakers with sufficient power and wealth have collectively determined to pursue, and ultimately implement these changes: they are going to happen. Rather, let’s simply acknowledge the trends and begin considering the financial implications of each.

Let’s face it, robots are incomparably more productive at accomplishing repetitive tasks than humans, and in today’s highly inflationary environment, productivity is paramount. Robots don’t get sick or need sleep or rest, and they don’t require benefits or over-time pay. While robotics benefits shareholders and corporate balance sheets, it threatens the human jobs it can potentially displace. Does that include yours? Might the displacement of employees caused by the advent of robotics introduce a universal basic income in America, and with it widespread dependence on government for basic subsistence? How exposed is your private wealth to such a development?

The perception that recent climate variation is caused directly and exclusively by human behavior has invigorated a powerful trend towards the development of renewable energies, including financial penalties on companies emitting an excess of “greenhouse gases”, but financial bonuses to those with the means of purchasing “carbon credits”. The (too) early abandonment of oil and gas holdings in this long transition from fossil fuels to renewable energies may have created a substantial investment opportunity short-term for the oil dinosaur, but this may ultimately be the biggest economic disruption in world history to date.

“Smart cars” were the first step towards autonomous, electric vehicles, powered by modern battery technology. I recently read America’s “car fleet cycle” runs 15+years, and that only 50% of today’s car owners intend to buy electric, so this, too, is a multi-decade trend. But might gasoline surcharges be applied, and a special license issued for gas purchases, to accelerate the trend?

Blockchain technology provides investors a new “store of value”, and allows for transactions to occur faster, cheaper, and without counter-party risk, benefits the rich are not ignoring.

The emergence of Asia is the final trend I’ll mention today, and the chart below says it all.1

 

 

 

These are some of the disruptive trends that should be on the radar of investors today. Think about it, Shaun.

1      https://howmuch.net/articles/trade-timelapse-usa-china

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.

Shaun Scott No Comments

China’s ‘Evergrande’ Invigorates a Stock Sell-Off

The S&P 500’s ongoing 18 month run without a 5% setback is in jeopardy, courtesy of Chinese real estate firm, Evergrande. The company is vulnerable to defaulting on an $80 billion loan payment due Thursday, should the CCP refuse to bail it out, and fear of contagion Monday delivered the U.S. averages their biggest daily decline since May.
1
Warren Buffet once said, “Only when the tide goes out (credit market tightens) do you see who’s been swimming naked”; the Lehman-like failure of behemoth, Evergrande, could be the catalyst of such a tightening. What does this situation mean for the markets going forward, and what are investors to do?

A healthy market advancement involves the indices periodically stooping to their respective 200 day moving averages, and occasionally “correcting” with declines between 10%-20%. These are important adjustments which keep valuations ‘in-check’ and hold speculators accountable, but have been absent this market since March, 2020.2 Further evidence the present market is a dangerous bubble which departed economic reality long ago is the fact America has for over a decade suffered more than $1 of new debt for every $1 of economic growth produced. A gardener who spends $5 on fertilizer to produce $4 worth of vegetables year after year would be dealt with expeditiously by a free market, yet it’s essentially what our government is, and has been, doing. The bull market in stocks is built on the foundation of money-printing and interest rate suppression, and requires both for a continuation. Proof of this assertion is the fact 25% of every corporation in America today is a “Zombie”, failing to produce sufficient revenue to meet interest payments on existing debt, and surviving only by borrowing more money at artificially low rates in an artificially ‘loose’ lending environment.

As bad as all that sounds, these disturbing facts do not mean the market party must end today. The stock market has been searching for a reason to correct, and Evergrande, along with the formality of a debt-ceiling debate, and possible Fed tapering, have finally provided a few. The euphoric sentiment which accompanies major market peaks briefly appeared in the first quarter, but subsequent bearish sentiment from institutional money managers suggests the party may yet continue. When every available investor is “all in” on stocks and “wildly bullish”, the lingering bear market will charge, but that’s not the case today. I expect the present setback in stocks will once again prove a “buy the dip” opportunity for investors starved of income and desperate for growth.

Pay no attention to the “China bashing” you’re hearing on TV; the Evergrande debacle will by no means deter, or even slow, China’s global economic domination. Look for evidence of this in the coming blog.

Think about it, Shaun.

1 Bloomberg, “Evergrande’s Total Liabilities Swell To Over $300 Billion”, August 31, 2021

[https://www.bloomberg.com/news/articles/2021-09-01/evergrande-s-falling-debt-masks-dues-swelling-over-300-billion][0]

2 CNBC, “Market’s record price action is mimicking late 1999 and it could spark a 10% to 20% correction, long-term bull Julian Emanuel warns”, August 30, 2021

[https://www.cnbc.com/2021/08/30/market-is-mimicking-1999-it-could-spark-10percent-to-20percent-correction-btig.html][1]

Securities offered through LPL Financial. Member FINRA/SIPC

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 performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.

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.

Shaun Scott No Comments

Inflationary Deleveraging & the Illusion of Wealth II

This week I would like to offer a self-correction on a particular thought conveyed in the last blog, or perhaps better articulate the point, and offer some final thoughts on this important and emerging subject.

First, certain points regarding inflationary deleveraging must be reiterated:

  •  Excessively indebted societies must periodically deleverage bad debt to avoid an otherwise certain social and economic downfall.

  • The two deleveraging options available to central planners are inflation and deflation.

  • Inflationary deleveraging involves controlling a high inflation rate while keeping real interest rates negative over a long period, such that nominal economic growth outpaces government debt, thereby lowering the debt/GDP ratio.

  • Inflationary deleveraging is the Fed’s clear choice.

  • The Fed has limited real control over the U.S. economy and financial markets but gets participants to do its bidding by controlling the narrative.

  • The Fed’s narrative involves talking up the economy, talking down inflation, talking up stocks and other “risk assets”, talking down gold and other dollar alternatives, talking up taxes, talking down interest rates (that’s a lot of talking!).

  • The Fed’s attempt to deleverage America’s bad debt through inflation has a small probability of success, requires the market to swallow the narrative long-term, and will have many unintended consequences, most notably the impoverishment of the middle class.

Last blog I inferred “the Fed’s inflation policy results in persistently high asset prices, commonly referred to as “The Wealth Effect”, but in reality it is “The Illusion of Wealth Effect”, which recently played out in Venezuela, as the cost of living outpaces asset appreciation”. A more accurate assessment is ‘in reality it may at any moment become’, “The Illusion of Wealth Effect”. This is a better statement and an important clarification in the argument because in America the rate of consumer price increases has not yet surpassed the growth rate of “risk assets”. My sincere apology for the misstatement, and this, of course, leaves one unanswered question.

Is inflationary deleveraging worth the risks of increasing America’s distribution of wealth, impoverishing her middle class, having to endure repeated systemic crises due to the weight of trying to carry a mountain of bad corporate debt, risking the global reserve currency status of the dollar, and risking the credibility of the dollar itself? You be the judge.

Think about it. Shaun

Did you know the ridges on quarters and dimes, originally 90% silver, were put there to prevent our government from cutting and melting the edges of coins to arbitrarily create additional currency units? Do you know what other nation’s government very famously did this?

“You have sown much, and harvested little. You eat, but you never have enough; you drink, but you never have your fill. You clothe yourselves, but no one is warm. And he who earns wages does so to put them into a bag with holes. “Thus says the Lord of hosts: Consider your ways.”

~Haggai 1:6-7

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.

Shaun Scott No Comments

Inflationary Deleveraging & the Illusion of Wealth

Excessively indebted societies must periodically deleverage bad debt to avoid an otherwise certain social and economic downfall. Central planners have two options when managing a highly indebted economy: allow painful bear markets and recessions to deleverage the system, which is deflationary (falling prices), or attempt to control a high inflation rate while keeping real interest rates negative over a long period, such that price increases in the economy outrun government debt, thereby lowering the debt/GDP ratio, which is inflationary (rising prices). Which option will the Fed pursue at this year’s Jackson Hole Symposium, what might the official narrative be, and what does that mean for the financial markets going forward?

The Fed doesn’t directly control the U.S. markets or economy because the dollars it supplies get deposited as bank reserves. In other words, the Fed can create new dollars, but it can’t force banks to lend them, or people and businesses to borrow and spend them. For this reason, the Fed has far less power over the economy and financial markets than most people understand. What the Fed does control is psychology and policy expectation, and by controlling the narrative, it can persuade market participants to do its bidding. The Fed’s narrative has been consistent since the 2008 Financial Crisis: rates will remain low, money-printing will back-stop the economy and markets to prevent the dreaded deflationary deleveraging, and inflation will be allowed to run higher, so borrow more money, take more risk, and buy more stocks! The Fed has staked itself in the inflationary deleveraging camp.1

In the end, the Fed’s ability to effectively manage an inflationary deleveraging of our market system depends on market participants believing the narrative. To pull that off, it must occasionally convince Mr. Market the economy is strong enough to withstand the withdrawal of the Fed’s monetary heroin. Expect a heavy dose of that ‘idea’ to circulate the news today, but do not expect essential policies to change; remember, the goal is to deleverage the system through inflation.

While the Fed’s inflation policy results in persistently high asset prices, commonly referred to as “The Wealth Effect”, in reality it is “The Illusion of Wealth Effect”, which recently played out in Venezuela, as the cost of living outpaces asset appreciation and as the dollar becomes the final release valve for the dreaded, though unavoidable, deleveraging of our highly indebted society.2 Every time the market doubts the Fed’s narrative deflation will take hold, so market crashes will occur as this scenario plays out. There will also be significant unintended consequences to innocent bystanders, most notably America’s middle class.

Think about it. Shaun

“The rich rules over the poor, and the borrower is slave of the lender.” ~Proverbs 22:7

1, 2 The Stansberry Digest, Daniela Cambone’s interview with George Gammon, August 25, 2021

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.

Shaun Scott No Comments

The Durable Foundation of Successful Financial Plans

The strength of every structure lies in the foundation on which it is built. While recently viewing an historic building as a potential future home for our office, to the noticeable discomfort of the selling agent I spent most of the time in the basement examining the foundation, sill, and support columns. Your family’s financial plan is a monetary structure, and lest it be built on the following firm foundation, it’s unlikely it will survive the test of time. The best family financial plans abide for generations, and there are cases in which families have retained and grown their wealth for 1,000 years. Consider the elements and simplicity of the durable foundation on which successful financial plans are laid.

Manage debt like you would a pet scorpion; cage it, starve it, and if you’re smart, you’ll terminate it. Virtually every financially successful person I’ve encountered in 33 years in this business functioned with minimal or no debt. You will never build financial wealth as efficiently in debt as you can debt free; therefore, make the following your highest financial priorities: a) follow a specific plan to aggressively reduce your debt until it equals less than 10% of your net worth, then make a plan to get it to 5%, then never let it exceed 5% again, and b) do not retire with any debt of any kind. Retiring in debt is like walking a greased plank blindfolded over a pool of starving sharks!

Maintain adequate emergency savings. Running a financial household without ample cash savings is like climbing Mt. Everest without crampons; every slip weakens your condition and reduces your probability of success. Absent sufficient emergency savings, unforeseen expenses will cause either borrowing, or a distribution from long-term investments, both generally destructive maneuvers. The appropriate amount of emergency savings is 9 months of total annual household expenses, so develop a budget and understand the cost of running your financial household. Don’t exceed the recommended amount by much or inflation will eat your lunch; don’t lag it by much for the reasons mentioned above; when circumstances require payment, replenish the amount as quickly as possible, which is one of the many reasons we must live below our God-given means.

Own the right amount of the right type of life insurance. Is the need temporary, like protecting a spouse or child from loss of income due to death? Then fund the need with temporary, or ‘term’ insurance, and shop around. Is the need permanent, like making sure sufficient capital is available at your death, and quickly enough to pay estate taxes so the family business isn’t lost? Then fund it with permanent insurance, and shop around. If you need help figuring the appropriate amount of coverage, or with researching the myriad of policy types and features available today, find a trustworthy, independent agent who will represent your interests; proprietary agents represent the interests of a specific insurance company. Never own a dollar of insurance you don’t need, and avoid the painful mistake of buying the wrong type of policy given your need.

Think about it. Shaun

 

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.

 

Shaun Scott No Comments

‘Market Top’ Indicator, Declining Breadth, Triggers

There are many reliable signals which indicate an approaching multi-year stock market peak. Early warnings include excessive speculation among novice investors, high valuations, and high levels of margin investing, signals all flashing red today. Mid warnings include weakness in small cap stocks, which appear to be rolling-over now, and in transportation stocks, which have been falling since May, as well as declining market breadth. The Advance/Decline Line shows how broadly stocks are participating in a market advancement, and is the primary gauge of market breadth.1 The 7’Th of Bob Farrell’s 10 Rules of Investing states “Markets are strongest when they are broad, and weakest when they narrow to a handful of blue-chip names”.2 Strong market breadth is critical to sustain an advancing bull market, but declining breadth, such as is occurring in some U.S. sectors (and foreign markets) today, reveals a bull market losing steam. What does this development suggest about the lifespan of the ongoing bull market? Might it reveal characteristics of the inevitable bear market to follow? How should investors prepare?

Advance/Decline Line charts for the NASDAQ, RUSSELL 3000, AND RUSSELL MICRO indexes all show declining trend-lines, while those of the DOW JONES, S&P 500, and RUSSELL 1000 seem to reveal a topping pattern.3 It’s noteworthy the trend-line for Hong Kong’s HSI, Singapore’s STI, Malaysia’s KLSE, and China’s Shanghai SE are all in free-fall,4 suggesting whatever market event looms is likely to be a global event.

An interesting study done in 2019 by Lowry Research on major market tops over the past 90 years revealed two consistent phenomena: the longer the major indexes advanced on deteriorating breadth, the longer it took for stocks to reach bottom from the peak, and the longer each ensuing bear market lasted. The longest divergence by far was the 24 months preceding The Crash of 1929, in which case the DOW JONES took 3 years to find bottom, and 25 years to fully recover. The shortest divergence was 1 month, and the average was 9 months.5 If our present case falls within the parameters of this impressive study, a) the present bull market can continue for two more years, b) but could end at any moment, and c) we are likely within 9 months of a major, multi-year peak in stocks. This is consistent with the forecast of many top investors today.

Since the divergence between falling market breadth and rising index levels has only just begun in the present cycle, there is no way to know how long the bull might run, how long the fundamental downtrend of the coming bear market might last, or how many months or years the recovery to all-time highs will require, but further indications will surface when the coming top is recognized in hindsight. Stay diversified with proper asset allocation, use proper position-sizing, incorporate a chaos hedge, carry a bigger cash position, avoid over-reacting, and dollar cost average the whole bust/recovery cycle, in what will likely be a classic and painful, yet healthy and cleansing bear market presenting wonderful opportunities to patient investors.

Think about it, Shaun.

“Markets tend to return to the mean over time. Excesses in one direction will lead to an opposite excess in the other direction. There are no new eras; excesses are never permanent. Exponential rapidly rising or falling markets usually go further than you think, but they do not correct by going sideways. The public buys the most at the top and the least at the bottom. Bear markets have three stages: sharp down, reflexive rebound and a drawn-out fundamental downtrend. When all the experts and forecasts agree, something else is going to happen. Bull markets are more fun than bear markets.” ~Bob Farrell’s Rules of Investing (Rule Numbers 1-5, 8-10)

“Give a portion to seven, or even to eight, for you know not what disaster may happen on earth.” ~Eccliastes 11:2

1,5 Lowry White Paper, “How Severe Will The Next Bear Market Be?”, April 2, 2019
2 Stock Charts, “Bob Farrell’s 10 Rules”, August 6, 2021

https://school.stockcharts.com/doku.php?id=overview:bob_farrell_10_rules

3,4 Market In Out, Stock Screener, August 6, 2021

https://www.marketinout.com/chart/market.php?breadth=advance-decline-line

Securities and advisory services offered through LPL Financial, a registered investment advisor. Member FINRA/SIPC

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.

Dollar cost averaging requires continuous investment in securities regardless of fluctuation in price levels of such securities. An investor should consider their ability to continue purchasing through fluctuating price levels. Such a plan does not assure a profit and does not protect against loss in declining markets.

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