On Stocks: Once More Before Year-end

By Brad Thomason, CPA


Several times this year I have written about the stock market, and because it has been such a big part of 2013’s financial story, I thought I’d hit it one more time before we close things out.

The market was off broadly today, supposedly due to weak holiday shopping numbers.  Or maybe people are just taking gains after what has been yet another flurry of appreciated appreciation.  Or perhaps Venus is in Taurus…

Looking at my previous posts from this year, I believe it is fair to say that my tone has not been so much negative, as cautious.  I think cautious is still the right tone.  On the one hand, when the market is hell-bent on climbing higher, hanging in there and riding the tide feels pretty good.  But we also know that markets don’t go straight-up forever, so hanging in there is not without risks.

Quick analysis shows 2013 to be a tale of two markets.  The first 5 months of the year had a nearly unbroken run up of about 17.5%.  The second 5 months climbed a comparatively weak 4.2%, amidst missing several really stellar opportunities to reverse and go lower (end of June, early September, early October).  Some have started talk of asset bubbles, and while I’m not sure the whole picture really points to that at the current moment, it is worth noting that a garden variety 10% correction (as opposed to a full-on bubble-bursting) would see us headed back to mid-March levels.  If you are a support/resistance type it has probably crossed your mind that if the correction were not contained at the psychologically-important 10% level, a fall all the way back to the year-ago level is possible.  Remember that line in Shakespeare about lots of sound and fury, signifying nothing?  Such would end up being the tale of the 2013 stock market.

It is also quite possible that we will continue notching new highs for awhile.  None of the usual tell-tales for an imploding bull run are currently on the chart.  At least not today.

It has been said that all financial decisions are made out of fear, though the fear comes in two versions:  the fear of losing what you have, and the fear of missing out on something good.  In my experience, this truth essentially divides the investor population into two groups.  There are those who do not have as much as they want and are working to make it grow, and those who more or less have what they need and are a lot more interested in hanging on to it than multiplying it (though they also enjoy getting a little productivity out of it too, if possible).  In general, determining which of these investors you are would be a good first step in deciding what to do right now with your stock holdings.

Growth investors may want to give voice to their fear of missing out by hanging on a bit longer.  I could preach about over allocation and rebalancing, but this crowd is unlikely to pay it much heed because the fruits of the past 12 months have them feeling pretty bullet proof right now.  But do please pay attention to signs of price weakness and think about what it might take to convince you a retreat is in order.

The larger part of our audience is that second type of investor, who wants to protect.  To this group, I congratulate you on a winning gamble.  I also remind you of the old axiom: buy low, sell high.  If you believe that then you should not be adding new money (buying high) right now, and you should be moving some of the winnings off the table.   Maybe even the whole pile of chips.

If you want to have a shot at reaping continuing rewards should the stock market keep going up, consider putting the moved-chips in an indexed annuity.  They give you upside potential without exposure to market drops (insurance companies can legally make guarantees of such things, where stock brokers and mutual funds can’t) and were essentially created for exactly this situation.  They are nothing short of an engineered response to the question, “Where do I move my money if I want to protect it from market shenanigans, but I’m not ready to relegate it to the no-yield world of CDs and Treasuries?”

Or you could consider a non-stock asset class, like tax liens or rental properties (a couple of my perennial favorites…).  Point is, if protection is more important than growth, realize that you just got handed a really nice bump to your net worth and you are going to feel like a doofus if you let it slip away as easily as it magically appeared on your brokerage statement in the first place.  Don’t do that, you know?

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