With the dawning of the new year and a new decade, futurists and forecasters offer a plethora of forecasts for the next 10 years. How much stock should you put in such musings?
Take the outlook for equities. Nobel Laureate Yale economics professor Robert Shiller prognosticates “the record stock market rally could go on for months if not longer” given the “animal spirits” in play at the end of 2019 with investor and consumer confidence at emotional highs. But all forecasters include “weasel words” to provide an out if the prediction is more chimera than reality. Shiller warns that high valuations could spell trouble down the line.
Investors are said by behavioral scientists to suffer from “recency bias,” a phenomenon whereby a person most easily remembers near term events versus what occurred sometime back. Recent events receive greater weight in forming a judgment than do earlier information or facts. Following the Great Recession, investors remained overly cautious, missing a good portion of the bull run. During periods of stress, people perceive that things can only get worse. When things are good, one leans toward things only getting better.
Every year, forecasters publish a list of “hits and misses,” predictions actualized and those that failed. Results usually end up at 50/50, or with luck, 60 percent positive, 40 percent negative. The point? Diversification counts. Stocks are for the “long run,” to trumpet Jeremy Siegel. Low volatility assets and money market reserves are important to handle unexpected Black Swan events or opportunities.
“A black swan is an unpredictable event beyond what’s normally expected of a situation and has potentially severe consequences.” (Investopedia). The crash of the housing market during the 2008 crisis is the most recent such event. 9/11 is another example. Going forward, who knows? Black swan events strike individuals, families and businesses close to home ─ accidents, death, disability, catastrophic illness, divorce, dissolution, property damage and loss ─ happenings that can have a far greater impact on financial and mental wellbeing than national or global events.
The other side of “taking risks” is “de-risking,” a critical element of personal financial planning and business planning. Having one’s affairs in order, with legal documents and insurance up-to-date, with sufficient “what if?” financial reserves. Having a business plan to assure value acceleration, succession, and continuity. “Stuff happens.”
As to asset allocation, respected columnist Mark Hulbert calls real estate “the single best investment for the next decade.” Since 2010, stocks and even long-term Treasury bonds outpaced real estate. But, asserts Hulbert, that’s “not the end. The stock and bond markets are currently so overvalued that it’s not only possible, but downright plausible, that real estate will do better than either of these asset classes over time.” Real estate generally should constitute some percentage of a diversified portfolio. Real estate, in what form, at what risk level, is part of a comprehensive discussion with your adviser.
Growth, income, or both? The same question applies to equity allocations. Recently, large capitalization growth stocks have led the parade. However, a prudent diversification would include value stocks, solid dividend payers, small- to mid-cap stocks, and international equities. Winning categories seem to rotate every few years.
What else may happen? Extreme weather will continue to plague farmers, insurance companies, lenders, and property owners. Wildfires, droughts, floods, tornadoes, hurricanes adversely impact cost-of-living factors in various locales. Health care costs, including long-term care for the elderly, will continue to increase. The Affordable Health Care Act, circa 2010, was supposed to be the solution, winding up neither affordable or a solution.
The federal debt will continue to grow, reaching unsustainable levels if interest rates rise, as they might. The result will be uncertainty over solutions such as budget cuts, tax increases, benefits, federal programs ─ anxieties that could precipitate market turmoil, business investment decreases, further political rancor.
China, the world’s largest economy as of 2014, will loom larger as a challenger. China has its problems but our economies are intertwined and American-Chinese relations will continue to impact stock and bond markets. China is the second largest buyer of U.S. Treasury paper, after Japan. A slowdown in China that motivates them to decrease Treasury purchases could cause our interest rates to rise. Rising rates increase borrowing costs for consumers and business and can slow our economy.
No matter your plans, there will be surprises, good and bad. America will continue to grow and expand. Yin and yang are realities, and fiscal and physical health are your best defenses. Faith is your best suit of armor with Heaven the ultimate reward. Everything else is transitory.