As the “easy money” era runs its course, money management doesn’t have to be difficult. A look at what’s next.
From low rates to where?
There was a time when retirement planning was straightforward. It went something like this: invest some money in stocks for growth, and buy bonds with the rest. After all, bond prices were stable, the income was predictable, and they behave differently than stocks. That makes them good diversifiers.
That game is over. Bond rates are too low to produce sustainable, positive returns. Baby Boomers approaching retirement may be tempted to go out and reach for higher yields. But that often ends badly, as such yields are attached to lower-quality bonds. What’s worse is that some investors get tricked into thinking that there is something “safe” about those higher yields. There is no free lunch on Wall Street.
Not to be outdone…stock market is a bubble too!
Stock market growth has essentially been “pulled forward” by Federal Reserve money printing over the last 5 years. In other words, the S&P 500 probably did better than it should have since 2016, because it borrowed returns from the future.
Now that the Fed has amassed a huge balance sheet, and corporations have used much of their stimulus money from last decade to invest in their businesses and employees…sorry, that was facetious. Companies spent a lot of that money to buy back their own stock. That pushed stock prices higher, but not due to better quality earnings. All it did was create a bubble.
This means that investing is a very different exercise than in the past. More on this below.
Tech stocks versus the rest
Recently, I wrote in this space about the stark difference in performance patterns between technology stocks and the other 10 market sectors combined. That is, whether it’s energy, consumer goods, financial stocks, REITs, healthcare or the rest, tech behaves differently. I think that tech is essentially its own asset class within the stock market.
That is lost on many market participants. And, we don’t know how a post-stimulus economy will treat tech versus non-tech. What I do know is that as a retiree or pre-retiree, you must understand this and adjust your investment process to account for it.
Do you speak Algo?
And, speaking of adjustments, here is one that would make any chiropractor blush. The stock market is NOT what it used to be. It is no longer about theories from the 1980s that worked in the 1980s, and maybe the 1990s. Modern Portfolio Theory (MPT) has been replaced by a blunt, digital innovation: the algorithmic trader. Whether it is an institution, hedge fund, or a small investor with a dollar and a dream, so to speak, quantitative investing has shoved its way into the mainstream.
What does this mean to you? That you had better get more familiar with what drives the “Algos.” Because they are at the root of much of this year’s stock market volatility. And, I don’t see that changing any time soon.
The best way I know of to speak the language of the algorithmic traders is to get more familiar with technical analysis, or “charting.” My late father taught me this 40 years ago, and it is the greatest financial-related gift he ever gave me. Like it or not, at the end of the day, the stock market is controlled in large part by computers. And, by humans operating some of those computers.
How to be a long-term investor (the contemporary way)
While long-term investing is still the mantra for Baby Boomers, the rules have changed. By learning more about how the markets operate now, and likely will going forward, you give yourself the perspective needed to keep emotions low, and your success rate high.