So major stock markets have reached their highest point in six years. We’re now at the levels of October, 2007, before the lights went out. Reassuringly, all the doomers and fearmongers reappeared to say we’ll die soon. Like Lassie, they always come back.
Are things too steamy to touch? Depends. People who buy only stocks, or things based on them (like equity mutual funds or index products), have finally recovered what they lost in the 2008-9 meltdown. (Remember, it was four years ago Saturday that stocks hit the bottom and selling hit the top.)
But those with a balanced portfolio (like 40% safe stuff and 60% growth assets) actually recovered from the crash of 2009 way back in 2010. Since then they’ve done just fine, with a three-year return about the same as the S&P – more than 8% annually. It’s a powerful lesson on two fronts. First, balance and diversification defeat volatility, which is the enemy. Second, people who buy stuff that’s rising and sell when it’s falling, get creamed. Always.
And there’s a third lesson: rebalance. Never buy one asset (like an index fund based on the S&P, which jumped 12.5% last year, or gold, which has lost 17% in 18 months), and just sit on it. In a smart portfolio you determine in advance what the weightings should be within the fixed and growth areas (like 16% US equities, or 12% Canadian, or 8% corporate bond index, etc.), then stick with them. So if a surging American market takes that 16% and turns it into 21%, you sell off 5% and redistribute this among the other asset classes.
Why? Because that’s how you make money. It’s the raw difference between investing and gambling. And it certainly suggests that in March of 2013 – after fat gains for US equities, a dismal showing by commodities and Canadian stocks, and a nice advance by international companies – that some portfolio renovation is in order. So, rebalancing takes risk off the table, harvests gains, and invests in those under-performing assets that are cheap.
You don’t do this? Of course not. Almost nobody does who’s not a pro. That’s because people live their lives in extremes – evident every single day on this pathetic blog. People come here to pump gold when it’s on a roll, push houses in Unionville when prices are coursing, or convince you every financial market is falsely inflated by overlords out to enslave you and steal your lunch. Always extremes. Buy only bonds, or run screaming from them. Load up on dividend-payers or dump all stocks. Hide in GICs or gamble on silver.
Fear and greed dominate. If people were cars, they’d careen in destructive circles as the brake and gas were pounded together. Four years ago today (March 9th), the greatest wave of selling ever to hit stock markets occurred as prices cratered, then scraped bottom. Forty-eight months later people stupid enough to throw themselves off that cliff still live in fear. Their losses were palpable and in many cases unrecoverable, simply because they ended up earning 1.2% in some zombie bank account.
Many committed even worse crimes. They took the remainder of the nesteggs and bought houses in Vancouver, Toronto or Saskatoon as prices surged to all-time highs. The greatest buying orgy in national history took place exactly one year ago, as prices crested and the market turned into a giant, straining gasbag. So not only did they bail out of financial assets at the low point in the cycle, but they gushed into real assets at the very top. And soon many will find those houses turning illiquid.
It’s hard to see this as much other than financial suicide. Human nature drives us to ignoble and failed conclusions. We desire what others covet and fear what they reject. We’re lazy and gullible, taking information from trusted and easy sources, like you stock-picking genius plumber brother-in-law. We’re utterly without discipline, buying tops and selling lows. We overreach for home runs, when singles and doubles win the game. And we alight on one, simple solution – precious metals, GICs, junior mining stocks – when it’s diversification that protects us.
These days there are many reasons to believe financial markets will continue to gain strength. The US is truly rebuilding, Europe’s repairing and global growth rekindling. Corporate profits are real, central bankers are winning and productivity is surging. But, of course, there will be corrections. Often rattling. Stocks jumped in 2010, dumped 20% the next year, and have surged back. If you understood rebalancing, you made money.
People aren’t defeated by markets, whether equity or real estate. They get crushed by their own emotions. Hubris, arrogance, ignorance or stupidity all guide us to the same place.
Lately, that’s been here.
Chart of the week...