Since I write a lot about personal finance on this website, and I?ve written hundreds of articles on investing on other sites, I frequently get questions about investment advice. My advice ? to the extent that I even give it ? is very guarded, and always framed with generous disclaimers. The fact is, I have no idea specifically how anyone should invest their money. I have even less inspiration as to where the stock market is heading. It seems to be in a certified mania, which is why the Dow could hit 30,000. That kind of market is never a solid basis for giving out investment advice, if I were even disposed to do so.
This article represents sort of my official general investment advice for anyone who asks. It?s actually inspired by a recent exchange with reader Kevin B on the Everyone Talks About Retirement But Few Will Ever Retire. I?ve been avoiding this topic for a couple of years, but Kevin B?s comment made me realize that it?s time to take it on.
If you?re hoping to get any investment strategies from this article you?ll be completely disappointed. What I?m going to express more than anything else is why I think the market has gone as far as it has, why I think it may go much higher, and why I think that?s not necessarily a good thing.
The Current State of the Stock Market
The Dow Jones Industrial Average (the ?Dow?) has staged a spectacular rally from a near-term low of 6,547 on March 9, 2009 on the heels of the Financial Meltdown. To be fair, that was an exaggerated low, given the circumstances of the time. But this point shouldn?t be given too much significance.
The market has roared back to its current level of 23,000+ (and rising), coming very close to quadrupling in a space of just 8 ? years. That?s extraordinary growth when you consider that the fundamental problems with the economy have not been fixed since the meltdown.
Even the increase from the pre-Financial Meltdown all-time high of 14,164 on October 9, 2007, is extraordinary considering the economic stagnation (at best) that?s taken place since. It represents a peak-to-peak increase of 62%, which doesn’t seem justified by the stagnation of the past 10 years. In fact, by a number of measures, the economy was better in 2007 than it is in 2017.
And let?s also not forget that the previous stock market peak was itself the top of a hyper-extended bubble. That?s why it crashed the way it did.
This Market is Plagued by Weak Fundamentals
Very little about this market makes any sense from a fundamental standpoint. Its rise can?t even be justified by steadily increasing corporate profits, because they too have mostly stagnated over the past five years at around $1.6 trillion per year.
The current price earnings ratio of the market, based on the S&P 500 collectively, is currently 25.74, versus a median historic level of 14.67 and a low of 5.31. That indicates that this market is trading at the upper reaches of its historic range (the all-time high was 123.73 in May 2009, after the Financial Meltdown obliterated corporate profits).
Market ?experts? can crow about strong fundamentals all they want but the facts don?t support the claim. When you hear that kind of talk, it?s mostly market hype. Or people who believe that economic history only began in the spring of 2009.
Does that mean that we?re on the precipice of a stock market crash? Possibly ? but probably not. That?s why the Dow could hit 30,000, and why I don?t like to give investment advice.
What?s Driving this Market ? and Why the Dow Could Hit 30,000
Okay, the stock market is in a bubble. That?s the basis of why I?m saying that the Dow could hit 30,000. It can reach that high, and higher, for all the same reasons that brought it to 23,000+.
As I outlined in my comment response to Kevin B, here are the ?forces? that I believe are driving this stock market, and why the absence of more solid fundamentals aren?t a factor.
In an article published last week on Casey Research – Why This Record-Breaking Market Should Terrify You, Justin Spittler and Joe Withrow warned that the CBOE Volatility Index (VIX) is currently sitting near record lows.
The VIX is often referred to as the fear index. That?s because it measures expected volatility in the financial markets. When the index is high, it indicates a high level of investor fear. When it?s low, it indicates low levels of investor fear.
The current level of the VIX is indicating virtual complacency among investors about the stock market. That?s considered to be a contrary sign and very bearish. Among other things, it could mean stocks will crash on really bad news. At that point, the confidence that?s driving this market could crash, and pull down the whole house of cards.
But up to this point, investors have been reliably ignoring even really bad news.
So we have this record stock market ? setting new ones practically every week ? and no one appears to be the least bit worried that it might be tracking too high to be sustainable.
Let?s move on?
We all learned about inertia in school. It?s objects in motion stay in motion, objects at rest stay at rest. The stock market is clearly in motion, heading ever higher. It will keep going higher until a Major Ugly Event disrupts the complacency and inertia, and sends it heading in the opposite direction. Until then, it?s full speed ahead.
Inertia means that the stock market is rising because the stock market is rising.
Believe me, it?s not semantics. To understand why it works the way it does, you?ll have to do a deep study of human behavioral psychology. (Hint: start with the herd mentality.)
Artificially Low Interest Rates
This is a stock market driving force that I?ve written about several times in the past, but it?s the most important driver. With short-term interest rates on safe investments below 1%, investors are more than willing to take a chance on double-digit returns in stocks. The puny returns on fixed income investments embolden investors to ignore risk in favor of higher returns, even if those returns are the result of pure speculation.
Until we get a significant increase in interest rates, which the Federal Reserve seems entirely reluctant to usher in (and for very good reasons, too involved to discuss here), the market should continue to power forward.
Corporate Stock Buybacks
Once illegal as a stock price manipulation tool, corporate stock buybacks have become standard corporate operating procedure in recent years. Companies are spending more money buying back their own shares than they are for innovation or research and development.
This practice has a significant impact on stock prices. When a company buys back its own stock, it reduces the amount of stock in public hands. That has the general effect of increasing the price. After all, the less there is of any item or commodity, the more valuable it becomes.
But while it?s happening, it results in unmerited (based on fundamentals) increases in general stock prices. It makes corporate executives look more intelligent than they really are, and the companies themselves appear more successful. It also doesn?t hurt corporate executives that the increase in share price provides handsome returns on their stock options.
But a company buying back its own stock is akin to a farmer eating his seed corn. In the short run, he may have more to eat. But in the long run, he eventually runs out of seed to plant to grow more corn. This is another indication that the fundamentals of this market are completely suspect.
The Exchange Traded Funds (ETF) Phenomenon
ETFs primarily invest in markets and market sectors. For example, the most popular type of ETF is one that invests in the S&P 500. These are referred to as index funds, because they are invested in an entire market, rather than a select group of stocks.
From an investment standpoint, they?re the perfect low-cost passive investment. Since they invest in entire markets, there?s very little stock trading in the fund. This means that the investment expenses associated with the funds are much lower than mutual funds, which are actively managed (traded more frequently). The ETF fund manager attempts to match the performance of the market or market sector, but not to outperform it.
ETF?s are being promoted as a relatively risk-free way to invest in stocks. In the past eight and half years they?ve looked like mutual funds from Heaven. They?re tied to markets that have gone straight up, without much more than a 10% correction.
The public has been convinced that these funds generally go up, if only because that?s been the recent experience. For that reason, they faithfully and consistently pour more money into them. Mostly this happens through automatic investing payroll deductions into 401(k) plans, IRAs and other long-term investment plans. This means that money keeps pouring into markets.
As successful as ETFs have been in the past few years, the reality is that they represent people investing in markets, rather than in individual stocks. In truth, the performance of individual stocks no longer matters. People are investing in markets, not stocks. As long as those markets continue to increase, investors keep pouring more money into ETF?s.
It?s a classic case of money chasing money, with no reliance on sound fundamentals whatsoever.
Supreme Faith in the Man-made god Known as the Federal Reserve
The US Federal Reserve maintains the integrity the banking system, directs interest rates, and acts as banker to the US government. To do that, the Fed is equipped with a very powerful tool ? it can create money out of thin air. Like the Banker in Monopoly, it never runs out of money. It was created by the federal government in 1913, and it was officially given this power.
Because the Fed can create as much money as it needs to, the US government and virtually the whole US economy fully rely on it to manage the entire financial system, and by extension, the entire US economy.
You know those ?budget battles? on Capitol Hill that happen about every two years, and threaten to shut down the government? They?re pure theatrics. The government isn?t going to go broke because it can?t balance its budget. It can borrow as much money as it needs to, and if it can?t sell its bonds, they will be purchased by the Fed. And since the Fed is a virtual bottomless pit of money, there?s virtually no limit to how much the US government can borrow.
Politicians are aware of this arrangement, and that?s almost certainly why they?re not really worried about the budget, or for that matter the US economy.
That confidence in the Fed has filtered down to corporate America and individuals. People generally believe the Fed to be so powerful that it?s virtually godlike. And since the Fed has been squarely in the corner of a rising stock market since at least the 1980s, investors have supreme confidence the stock market will continue to levitate higher.
There?s even a Wall Street saying for the phenomenon: Don?t fight the Fed.
And the entire investment community said AMEN!
The New Religion of the Stock Market Rising Forever
A Stock Market Rising Forever has become a new religion, and the Federal Reserve is its god. This is another central point that I made in the comment to Kevin B:
?The stock market, mania that it is now, has a religious following that?s virtually cult-like. If you challenge the fundamental integrity of the bull market, you?re messing with people?s religion. A lot of financial futures are predicated on the idea of double-digit returns forever, and people don?t take kindly to alternative thoughts, regardless of how well-thought out they might be.?
I?m taking the vain liberty of quoting myself here because I can?t possibly improve on that observation. Right now, millions of people are anxiously anticipating early retirement in five or 10 years, based on perpetual double-digit returns from stocks. They cannot be objective in assessing the reality of the market. They represent a core of faithful believers/investors/apostles, who will continue to pour every last dollar into the market, in the hope of making their dream a reality.
And if you ever ask what you should do with your money, they?ll faithfully?proselytize that you must plow it into the market without reservation. If you disagree or challenge their assumptions, they?ll react like an angry preacher.
Believe me ? I?ve been on the receiving end of their tirades more than a few times.
How Should We Invest in a Mania-Driven Market?
The short answer is I don?t know. The conventional wisdom is to continue riding the elevator up. There?s actually some merit to that recommendation.
This market will fizzle out at some point, but nobody knows when ? certainly not me. Nor am I going to venture into predicting when it might happen or what the cause will be.
The Dow could hit 30,000, and a lot higher. That?s why as much as I?m hesitant about this market, I would never bet against it. It makes sense to have at least some of your money in stocks right now. But I would avoid jumping in wholesale, under the assumption that you will get rich in a few years. Always remember that there?s intelligent investing, and there?s raw speculation. When you invest at market tops, it?s closer to raw speculation. That?s about where the market is at right now.
A good friend of mine, a gentleman much older than me, told me an unfortunate story about his own father. His father made a lot of money investing in real estate. It was what he knew best. But by 1928, the stock market reached such levels and had become such a widely accepted mania, that he sold all of his real estate holdings and invested the money in the stock market.
As we all know, stock market crashed in 1929. By 1932, this man was broke. My friend also believes that it led him to an early grave, just a few years later.
This is what can happen if you invest everything at a market top. That?s why I think this approach should generally be avoided.
Invest With Extreme Caution
If you want to get into this market, do it with a minority percentage of your portfolio. And do it gradually. Use the the dollar cost averaging method, in which you invest regular amounts of money in the market periodically. By doing this, you won?t get crushed in a major market reversal, the way you almost certainly will if you plunge in with reckless abandon.
Sure, returns on fixed income investments are pathetically low right now. But at least they?re safe. Wait until the market has a major reversal before getting in with larger amounts of money. No matter what the self-made Oracles of the Market will tell you, the reality is that the market crashed three times in the past 30 years ? 1987, 2000-2002 and again in 2007-2009.
That can’t be ignored.
Anything that?s happened with that kind of frequency is destined to happen again. It?s even more likely in the aftermath of manias, since they drive values to unsustainable levels.
I believe that the best strategy right now is to ?keep your powder dry?. Hold most of your money in cash and wait for the major market reversal. When that happens, summon up the courage to buy into the market. That?s when potential future returns will be much greater and more predictable than they are now.
That?s all pretty vague advice. But I think it?s the only approach that makes sense given current exaggerated valuations.
Any thoughts or counter opinions? What would you tell someone to do with their money now, if they are a?
- Young person just beginning to invest?
- A person in retirement?
- A person just a few years away from retiring?
HI Kevin. I’m clueless about what to do right now. Actually, I was clueless before, too. No one knows what’s going to happen with the market, but I do agree that a continuous climb with double-digit payout is unsustainable for any length of time. I prefer safer avenues for my hard-earned money. Yes, little return, but at least I know what I put in is still going to be there. I’m probably wrong on this, but my husband and I are older, and we can’t afford to lose right now, as we don’t have the time to make it up. I guess that’s why I strongly believe in a debt-free life. For us, that’s the best investment advice I can give. One shouldn’t be investing in the market with money that you may need to live on in the near future. Just my two cents.
That describes my thoughts on the market right now Bev. The best description I’ve heard recently is that the chance of taking a 50% loss in the market is now just as great as making a 10% return. Yet I still think that at least some money should be invested in the market anyway. This rise could go on for several more years, based on all the factors I described in the post. Logic and fundamentals say no, but the market isn’t rising on logic and fundamentals anymore and that’s what makes this market different than previous ones.
The best advice I can give a younger person would be the following, some of which I followed in my own life:
1. Invest in things that you can control, such as your health, skills to enable that you’re employable and can support yourself, cheap transportation like a good bike, and relationships. And, things that you can quickly access. As someone recently said to me, “Wealth isn’t about how much money is in your pocket, but about flow and your access to sources of capital.”
Your health is key — you lose that, and you lose everything else.
Always make sure that you can get a job and keep the income coming in. You’ll not make good money for certain periods in your life, but at least you can work to earn money.
Stick with friends who have a similar outlook on life, and who don’t aspire to status-seeking or living by corrupt values. Those people will turn on your if it suits their purpose.
Lastly, you can control a system much better than you can control a goal/outcome. Well-run systems can increase your options, which is what you want instead of just a few goals.
2. Avoid debt like the plague and adopt a minimalist life, as much as you possibly can. The minimalist life frees up time and resources to do other things, or to pivot quickly when the shit hits the fan.
3. Live life like you’re already retired. That is, if you want to take that trip to Spain or Bulgaria, save up the money and do it on the cheap. Don’t wait until that storied “retirement” to do those things. Do them now when you have the time and the ability to do so. That “retirement” might never come, or you have the money, but can’t do it for health reasons.
Also, when opportunity knocks, open the door. But, do this in such a way that the opportunity will help you and not set you back.
4. Change is inevitable. What goes up must come down. You’re ahead and then you’re behind. Practice non-attachment to goals and outcomes.
Hi Tim – It’s interesting that both you and Bev take the position of controlling your life apart from investing. It’s brilliant on both your parts! We can control how much we invest and where we invest it, but we can’t control how things turn out after we make those moves. For that reason, we need to take greater control over everything else. When you think about it, that’s the ultimate form of diversification. This notion that you can invest around any problem in life is a false religion of the highest order.
I love your point #3, “Live life like you’re already retired.” It emphasizes a holistic approach to life, rather than backloading your life for a glorious existence in retirement at the very end.
Wow, I’ve never been an inspiration for anything 🙂
Thanks for expanding on the topics I mentioned. We’re pretty much on the same page.
The main mistake I’ve made in the past has been investing in individual companies. I hate to say that I was long Facebook at 22.50ish a share but was so nervous about it and sold at 22.90 and never got back in – now $180+. Then, on the other side, I was long Twitter at 33 at one point, sold for a small gain, but now it’s in the low 20’s. And I’ve been long some companies/scams that went bankrupt. Oh well.
If investing in anything right now, I would look at things that are undervalued. Not everything is in a raging bull market. Energy/oil-related names have been crushed in the past year. If you don’t believe that oil is going away anytime soon, these names are for sale – down 10-20% this year. ETF’s are XLE, XOP, and OIH. I believe that next year will be a different year for these names.
Gold? Undervalued, but I don’t understand how/why it trades to be honest. People say it has something to do with inflation, but seems to me like it has more to do with faith in the Fed/Central Banks which is why it has been down for the last 5 years or so. GLD is the ETF with GDX/GDXJ as the miner stocks.
I’m not running this site, so I can give a little investment advice 🙂
I agree with Kevin M that you should sock away a little bit at a time. Dollar cost averaging is probably the best approach for most people. Pay down debt – you get a much greater return doing that than anything. I don’t really subscribe to everything Dave Ramsey says, but there is some wisdom there.
Anyway, I will stop with my hijacking of the topic 🙂
Hi Kevin – Hijack away! Comments from readers like you are what inspire post ideas, and teach me much about what I don’t know. This blog is an exchange of ideas more than anything else. The blog posts themselves are designed mainly to get the conversation going.
As to gold, it’s mostly a play on instability. It’s more a counter weight to the US dollar (modern gold) than anything else. The notion that it’s a counter on stocks or bonds is very weak in my opinion, and not worth seriously considering. But considering the level of debt throughout the economy, in combination with weak economic fundamentals, holding a small investment in gold could be well-advised. For the record, I don’t own any gold, but I have in the past. You can make money on it, but only in select situations.
As to energy, I’ve been following it and agree with your take. The problem is that while energy has fallen, the general market has kept it from falling as far as it probably should have. It’s not expensive, but then it’s not really cheap either in a way that would guarantee a strong return. Doug Casey has recommended energy stocks, but only once they return 6-7% on their dividend yields. That sounds about right.
I’ve wanted to comment on this post for awhile now. I could not write anything down that didn’t seem like a lecture. That’s not what I wanted to get across.
The advice I would give a young person just starting out would go something like this.
1- The advice written above is good in many ways. Invest in yourself first. Learn by reading. In today’s day and age with all the information online they’re is no excuse not be educate yourself on an endless stream of topics.
Before entering into any type of financial commitment understand what it is your getting into. Don’t take the blind advice of a financial advisor. Understand why your investing. What is your goal. Is it long term? Short term?
What is your end game? What or how can you exit it without a huge penalty. Can you? What are the fees? If it is long term can you ride out the waves of up and downs that will occur over the life of the investment.
2- Invest in your health. Like was said above. Without it you have nothing. All the money in the world will not overcome poor health.
3- Invest in relationships. Healthy ones. Ones where both parties benefit. I have found in my own business that having talent for something is not enough. Networking with the right people can make all the difference in the world. Deals are made over dinners. Gym memberships. Gold memberships. Private social clubs. Not going in to somebodies office and sitting across a desk from them. If you don’t have more of a relationship with that person nothing you say will really matter. Get to know somebody first before you come to them with a idea or deal or whatever it is you do or offer.
4- Be consistent. Investing in these types of things takes time. It doesn’t happen over night. Sometimes things take years to develop. Don’t move 10 times. Every time you start over it sets you back two years. Don’t change careers every other year. Or start a business and stick with it for 6 months or a year and change. Keep at it.
I’ve read where guys like Mark Cuban say that most businesses fail just because people give up too soon.
5- Don’t invest in things you don’t understand. If you don’t know what PE Ratio is. Or how to read a company balance sheet. Or understand the cash flow of a business or what they’re product is then don’t invest in it.
If you don’t understand bitcoin don’t invest in it.
Invest in things you understand or are willing to spend time learning about.
It always amazes me when people spend more time figuring out how to lower they’re cable bill or heating bill or whatever but blindly turn over thousands of dollars to something without doing any kind a research.
6- last but not least. No Debt. My father told me a long time ago. If you can write a check for it you can’t afford it. That includes a house. It is not a right in this country as some would have you believe. If you can’t purchase one then you rent. So be it. Same with a car. If you can’t buy it for cash you can’t afford it. Take the bus or train. Uber it. Whatever. Buy a thousand dollar car and fix it. It’s still less per year that making a 500 or more dollar a month car payment.
This is my advice to anybody. I take my own advice. It’s the only way I know.
There are some typos above.
If you can’t write a check for it you can’t afford it. Not if you can.
Gold membership is golf membership.
I would edit it myself but didn’t know how.
Spelling errors and all, it’s solid advice Tim – as usual. It all points to the work-save-invest strategy that was once the preferred way to go, before serial bubbles convinced people they could get rich from what is essentially speculation. I especially like point #4. I’ve found it to be true in my own life. Any time you make a change – even for the better – it sets you back. That’s why it’s so important to stay with whatever you’re doing. You have to give it time to let it work.