Uh-oh, Canada. China Pales as a Risk to U.S. Growth
Canada probably experienced a technical recession in the first half of 2015, and the fact that the No. 1 U.S. export market is in a slump could spell bad news for growth in the world's biggest economy.
"When Canada hurts, U.S. exporters do, too," Bricklin Dwyer, an economist at BNP Paribas in New York, wrote in an Aug. 27 note to clients titled "Canada (not China) matters more."
DYI quick comment: Overvalued markets with a deteriorating economy; Houston we have a problem!
Fed Up Investors Yank Cash From Almost Everything Just Like 2008
Since July, American households -- which account for almost all mutual fund investors -- have pulled money both from mutual funds that invest in stocks and those that invest in bonds. It’s the first time since 2008 that both asset classes have recorded back-to-back monthly withdrawals, according to a report by Credit Suisse.
Credit Suisse estimates $6.5 billion left equity funds in July as $8.4 billion was pulled from bond funds, citing weekly data from the Investment Company Institute as of Aug. 19. Those outflows were followed up in the first three weeks of August, when investors withdrew $1.6 billion from stocks and $8.1 billion from bonds, said economist Dana Saporta.
“Anytime you see something that hasn’t happened since the last quarter of 2008, it’s worth noting,” Saporta said in a phone interview. “It may be that this is an interesting oddity but if we continue to see this it could reflect a more broad-based nervousness on the part of household investors.”
John P. Hussman, Ph.D.
If you need to reduce risk, do it now
It’s important to recognize that the S&P 500 is down only about 6% from its record high, while the most historically reliable valuation measures are double their historical norms; a level that we still associate with expected 10-year S&P 500 nominal total returns of approximately zero.
"We fully expect a 40-55% market loss over the completion of the present market cycle."
"Such a loss would only bring valuations to levels that have been historically run-of-the-mill."
Investors need not expect, but should absolutely allow for, a market loss of that magnitude. If your investment portfolio is well-aligned with your actual risk tolerance and the horizon over which you expect to spend the funds, do nothing. Otherwise, use this moment as an opportunity to set it right. Whatever you're going to do, do it. You may not get another opportunity, and if you're taking more equity risk than you wish to carry over the completion of this cycle, you still have the opportunity to adjust at stock prices that are close to the highest levels in history.
Again, if your portfolio is well aligned with your risk-tolerance and investment horizon, given a realistic understanding of the extent of the market losses that have emerged over past market cycles, and may emerge over the completion of this cycle, then it's fine to do nothing. Otherwise, use this opportunity to set things right.
"If you're taking more equity risk than you can actually tolerate if the market goes south, setting your portfolio right isn't a market call
- it's just sound financial planning."
It's only fun to be reckless if you also turn out to be lucky. Market conditions are now more hostile than at any time since the 2007 peak. If you want to be speculating, and you can tolerate the outcome, then you're not taking too much equity risk in the first place. But it's one or the other.
Can you tolerate a 40-55% market loss over the next 18 months or so? If not, take this opportunity to set things right.
"That's not the worst-case scenario under present conditions; it's actually the run-of-the-mill historical expectation."
DYI Comments: For those using a fixed asset allocation of stocks versus bonds; determine how much grief you can tolerate during a market smash (50% or greater).
| I can tolerate losing ______% of my portfolio to earn higher returns: | Recommended percentage to invest in stocks: |
|---|---|
| 35% | 80% |
| 30% | 70% |
| 25% | 60% |
| 20% | 50% |
| 15% | 40% |
| 10% | 30% |
| 5% | 20% |
| 0% | 10% |
Studies going all the way back to the 1950's and right up to the present have stayed at no higher than 20% loss for the average investor/saver. It seems for what ever reason once past that 20% mark people will either, at best, stop investing and at worst sell out at the bottom. My experience (40 plus years) of talking to average investors, those who understand the need to save (401k, IRA, etc) but have little or no understanding of the markets, I've placed 40% stocks / 60% bonds. This eliminates that awful feeling in the stomach during market declines. Of course they will have to save a higher percentage of their earnings to achieve the same goal.
What DYI attempts to accomplish through our formula based investing is to avoid or dial down your exposure to inflated markets and dial up in undervalued markets. Using four distinctly different (uncorrelated) assets; stocks, long term bonds, gold, and cash (short term notes) hopefully a bull market can be found.
AGGRESSIVE PORTFOLIO - ACTIVE ALLOCATION - 8/1/15
Unfortunately due to the world's central banks sub atomic low interest rates plus 1st world Baby Boomers savings glut have pushed up asset prices to the moon. Only until recently with the market smash in gold/gold & precious metal miners our allocation is up to 15%.
While everyone else is losing their heads don't go and lose yours. This over inflated stock and bond market will pass with lower prices driving future returns higher. For the real long term investor this is a blink of an eye. Patient's is the mark of a value player.
DYI
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