Market volatility has continued since all-time highs were reached in mid-July.
Stock prices dropped a lot in late July and early August. The Nasdaq dropped about 16% and the S&P 500 dropped about 8%.
Stock prices rebounded strongly in August. Both the S&P and the Nasdaq climbed roughly 10% in the first three weeks of August.
In the last two weeks the Nasdaq has fallen about 7% and the S&P 500 has dropped about 3.5%.
This is very erratic and unusual behavior. It points to market instability. This is not a healthy market.
One good inflation report sends the market higher and one bad employment report sends the market lower. The inflation and recession dance continues, and it will likely take many more months before there is any clarity on both of these major economic issues.
Markets are always faced with uncertainty, but the current moment represents a highly uncertain time. In addition to the inflation and recession fears, the markets are dealing with:
· A slowdown in economic activity in China and what that might mean for the US economy.
· The looming November elections.
· A rate cutting cycle from the Fed beginning next week and lasting six months or so.
· The AI revolution and its impact on corporate profits.
We don’t usually put too much emphasis on big macroeconomic issues for our investing, but when they cause this much volatility in stock prices, we tend to get more conservative.
Our own market valuation models indicate that the S&P 500 is still about 10% overvalued right now. A plus 10% reading is not excessive, but we prefer undervalued markets.
The trailing 5-year, 10-year and 15-year average annual returns for the S&P 500 are also significantly above average. 15-year returns for the S&P 500 are roughly 40% above the average of the last 100 years. This represents a pretty long time for above average gains. Markets have a way of reverting back to the mean.
The risk/reward meter is tilting toward risk right now. We do not believe that this is a good time to be overly aggressive in your investing.
Stay Disciplined My Friends,
Phil McAvoy
Disclaimers The Beyond Buy & Hold newsletter is published and provided for informational and entertainment purposes only. We are not advising, and will not advise you personally, concerning the nature, potential, value, or suitability of any particular security, portfolio of securities, transaction, investment strategy or other matter. Beyond Buy & Hold recommends you consult a licensed or registered professional before making any investment decision.
Investing in the financial products discussed in the Newsletter involves risk. Trading in such securities can result in immediate and substantial losses of the capital invested. Past performance is not necessarily indicative of future results. Actual results will vary widely given a variety of factors such as experience, skill, risk mitigation practices, and market dynamics.
Every investor needs to fully understand the amazing power of compound growth. Investment growth accelerates exponentially when you give your investments enough time to grow.
The earlier you start saving for retirement, the less money it will take as a percentage of your income to achieve your goal. The opposite is also true, unfortunately. The less time you have, the higher percentage of your income you’ll need to contribute to achieve your goal.
This is due to the power of compound interest. The important lesson of compounding is that you should start saving and contributing to your 401(k) as early as possible. There exists an incredible window of opportunity for maximizing the power of 401(k) plans from your early twenties until your late thirties.
This is another one of those things that everyone should have learned in high school.
This graph below shows the balance of a 401K where the individual started contributing at age 25 and contributed an equal amount each year. The annual investment return rate or growth rate is also constant. So, the only factor affecting the slope of the line is compounding. Notice how the line start curving straight up after age 50. This is the compound effect.
From the graph, see how the growth is not so exciting from age 25 to 45 - twenty years. By the time you reach the 30 year mark (age 55), the growth in the investment account starts to accelerate. This person did not increase their savings in these later years. The growth benefit came only from the power of compounding.
A 401K investor can affect their retirement account balance the most by starting to make contributions as early as possible – in their 20s or 30s – and by generating higher investment returns through their fund choices.
A target date fund investor will earn about 6.5% per year on their investments in the long term. A better investor will earn 9.5% per year on their investments. A 40% increase in annual investment returns like this will lead to a 90% increase in your account balance over several decades thanks to compound interest.
Compounding still works wonders for investors in their 50's and 60's.
A 55-year-old retirement investor has a very good chance of living to age 85. So their investment time horizon is 30 years. That is still plenty of time to gain the tremendous benefits of compounding.
We often work with customers in their late 50's and early 60's and we are often able to increase their retirement income by 80% due to higher investment returns and the power of compound interest.
Stay Disciplined My Friends,
Phil
Disclaimers The Beyond Buy & Hold newsletter is published and provided for informational and entertainment purposes only. We are not advising, and will not advise you personally, concerning the nature, potential, value, or suitability of any particular security, portfolio of securities, transaction, investment strategy or other matter. Beyond Buy & Hold recommends you consult a licensed or registered professional before making any investment decision.
Investing in the financial products discussed in the Newsletter involves risk. Trading in such securities can result in immediate and substantial losses of the capital invested. Past performance is not necessarily indicative of future results. Actual results will vary widely given a variety of factors such as experience, skill, risk mitigation practices, and market dynamics.
If you know me, you won’t be surprised to hear me say that I don’t believe people should be investing in cryptocurrencies with their retirement funds. Crypto is fine for speculators and there is a role for speculators in our economy, but speculating is a dangerous game to play for ordinary investors.
You get a sense of the volatility of crypto in this price chart of bitcoin. The last three years have been a wild ride for bitcoin investors. The price of bitcoin dropped by 70% in 2021, and it has gained it all back in the last year.
Bitcoin and the other crypto options are new forms of currency that trade on the new blockchain technology. For simplicity, I will focus mainly on bitcoin in this post as it is the biggest cryptocurrency.
As an investment, it is best to think of bitcoin and the other cryptocurrencies as commodities and not currencies. They behave like commodities whose prices are mainly driven by supply and demand factors. Crypto prices are much more volatile than traditional currencies like the dollar or the euro.
The crypto enthusiasts believe that this new form of payment represents a seismic shift in how we are going to handle money in the future. I understand their enthusiasm, but I have no idea what the future for cryptocurrencies will look like.
Last year we saw the creation of ETFs for cryptocurrencies, and it is now possible to invest in crypto inside some 401K plans. The introduction of these new ETFs and the approval of crypto for 401K plans has and will increase the demand for cryptocurrencies which drove the price increases over the last year.
Bitcoin has also become popular in countries with high inflation and devalued currencies, such as Venezuela. Additionally, it is popular with those who use it to transfer large sums of money for illicit and illegal activities.
Bitcoin will have a fixed number of coins minted and the supply will stop increasing in 2140. The number of new bitcoins introduced gets cut in half every four years. Limited supply is one of the main attractions of bitcoin to speculators.
Let’s compare bitcoin as an investment to my favorite investment, stocks.
When you own one stock or hundreds of stocks in an ETF, you own a share of the profits that those companies produce. On a simplistic level, when the profits of the companies increase, the price of the stock increases and the opposite occurs when the profits decrease. We know that other things influence the price of stocks in the short-term but in the long-term the biggest factor is profits.
If you are like me and you believe in the long-term profit growth of the companies in index funds representing the S&P 500 or the Nasdaq, for example, you can be very confident that those stock prices will be higher in the future.
Cryptocurrencies don’t produce any sales or profits on their own. As a currency, they facilitate sales but there are no income statements to evaluate for bitcoin.
Buying bitcoin is gambling and not investing. There is no consistency or predictability of bitcoin as an investment. And nobody understands why bitcoin goes up or down in value. Clearly the price of bitcoin is a function of supply and demand, but what drives the demand side of the equation other than people betting on a future dominated by crypto? Nobody really knows. What if more countries introduce regulations to limit the use of cryptocurrencies? It is believed that China moving away from bitcoin in 2021 led to the big decline in crypto prices.
When you truly understand your investments, you understand the risks associated with those investments. Very few investments come without any risk. Understanding the strengths and weaknesses of any investment is the key. S&P 500 Index funds are great investments but owning one of these funds does subject you to the irrational and dramatic ups and downs of the stock market. Knowing that allows you to be more patient during periods of stock market volatility because the stock market always goes up in the long run.
If you have some “fun” money that you can afford to lose and the idea of speculating on bitcoin appeals to you, go right ahead. But you should not include bitcoin in your retirement investments.
Stay Disciplined My Friends,
Phil
Disclaimers The Beyond Buy & Hold newsletter is published and provided for informational and entertainment purposes only. We are not advising, and will not advise you personally, concerning the nature, potential, value, or suitability of any particular security, portfolio of securities, transaction, investment strategy or other matter. Beyond Buy & Hold recommends you consult a licensed or registered professional before making any investment decision.
Investing in the financial products discussed in the Newsletter involves risk. Trading in such securities can result in immediate and substantial losses of the capital invested. Past performance is not necessarily indicative of future results. Actual results will vary widely given a variety of factors such as experience, skill, risk mitigation practices, and market dynamics.
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