In March 2009, the stock market began this almost nine-year run-up. As of today, January 18, the market is up 1,000 points in seven trading days. Investors are more optimistic than they were a few months ago, many fearing they’re going to lose out on gains. Recent US corporate tax cuts will improve corporate earnings and have already resulted in salary/wage increases and bonus payments to employees. Apple recently announced the repatriation of money, expecting to pay a $38 billion tax bill as well as announcing significant investments within the United States. The outlook for our US-based companies is positive and the economies of several countries are experiencing growth.
Good news is everywhere: I am reminded of a previous wave of exuberance investors’ were feeling in 1998 and 1999. During those years, some mutual funds experienced a 100% gain, mainly in tech and .com companies. It was said that a monkey could have thrown darts at the stocks listed on the exchanges and doubled the money. We then began a series of ups and downs signaling an ageing bull market; then cometh 9/11/01.
Most investors know we are in the final stages of a bull market but when will the bear market arrive? Somewhere between next week and four years from now. An adverse world event could trigger the decline next week while the absence of a recession could push the bull market for several years. Consumer optimism and outlook is more positive than any time in the last 20 years; GDP growth is expected to hit 3+% and continue.
For financial planners and investment managers, the only way to navigate coming rough waters is understanding each investors risk tolerance. Many mutual fund salespersons and even money managers are using an old-fashioned 10 to 12 question risk tolerance tests. Bad for the investor, technology has advanced way beyond that outdated method. The current method evaluates risks where the investor chose possible outcomes, then settling on the most acceptable outcome. Everything is expressed in terms of probabilities: if you have $500,000 to invest could you accept a 95% probability you could lose up to $150,000 while on the other hand gaining up to $175,000 – at the 95% confidence level?
Investment Horizon is another critical factor each person must consider.