JUST PLAIN TALK: The market set a new high

Buz Livingston

I read Jonathan Clements’ “Humble Dollar” blog regularly; you should, too. Tying fact with fiction, Clements recently argued investors should prepare for the next downturn like Eeyore, Winnie the Pooh’s pessimistic donkey friend.

Markets are like the weather; no one can predict the future with any consistency. A dose of caution is always prudent. The S&P 500 has bounced back from last March’s lows to new highs, but recoveries rarely happen this quickly. Like preparing for a hurricane when the sun is shining, Clements urges investors to re-examine their risk tolerance. Even if you didn’t liquidate during March, loss-harvesting excluded, imagine how you would have reacted if the S&P 500 was still in negative territory.

Retirement plans often have default recommendations tied solely to age, but don’t stop there, determine your personal risk tolerance. The S&P 500 lost almost 40% in 2008; make sure you won’t bail out in an extended downturn.

While stock prices, in the aggregate, are higher, the rally is extraordinarily narrow. 0.2% of all stocks listed on the NYSE and NASDAQ account for the majority of the recent rally. Without them, the S&P 500 would be down for the year. In the past, when only a few companies led the market, they were often spread among diverse market sectors, but the technology sector carries the burden today. Apple, Microsoft, Facebook, Amazon, and Alphabet (Google) account for over 20% of the S&P 500’s value. We are in some uncharted financial waters.

Safe investments like CDs, money market funds, high-quality short term bonds, and bonds funds have low yields. Don’t dismiss them. Instead, look at them as a type of portfolio insurance, or something that will maintain value when stocks decline. Any money needed within two-three years, maybe as high as five years, according to Clements, should be in something safe. A wise man once noted the return of your money is often more important than the return on your money.

If the economy gets worse, more jobs will be at risk, perhaps yours. If you are not tracking your spending, start now. Determine essential and discretionary expenses. Should a layoff occur, knowing your fixed costs is critical. Set up a home equity line of credit to give you readily available cash for emergencies … only.

As long as you invest, you will make mistakes. Warren Buffett often talks about his slip-ups, and some of his losses have multiple commas. Adam Grossman also posts for “Humble Dollar,” and he wrote about dealing with mistakes. He pointed out the dozens of times Michael Jordan missed the game-winning shot. Sometimes mistakes are your fault, and sometimes they aren’t.

You are reading a financial column, but the biggest mistakes in your life probably won’t be about money. Of course, money is essential, but it’s not the only thing. Relationships are more important, and mistakes there are worse.

You can’t always get what you want, but Buz Livingston, CFP, can help you figure out what you need. For specific advice, visit livingstonfinancial.net or drop by, masked, 2050 West County Highway 30A, M1 Suite 230.