The stock market has been a roller coaster ride the last few days. First a 510 point drop last week, then the S&P downgrade triggered a 624 point drop Monday, followed by a 429 point rise on Tuesday.
I had the opportunity to speak with Rob Morgan this week to put some of it into perspective. Rob is the Chief Financial Strategist for Fulcrum Securities and an investment veteran of 22 years.
I quoted Rob in an article last week right after the 510 point drop Thursday at which time he said he believed we were in the midst of a correction rather than a bear market. I was curious if his perspective had changed over the last few days in light of the new events.
Are we in a bear market?
Rob said that he still doesn’t believe that we are in a bear market, but he has become a bit more cautious. Technically, he said a bear market occurs if the market slips 20% or more from its previous high. In the case of the S&P 500 index, that would be a close of 1090 or less, so we got close in the latest pullback, but not all the way. He advised though that anything is possible and there are no guarantees.
As to being more vigilant, Rob said, “On Friday, I lowered my weight in stocks. The way I view the investment business, we aren’t in the guessing game business, we’re in the risk management business. There are still a lot of positives for stocks, but on Friday, I realized there is downside risk as well.”
By most investors’ standards, the bear market we experienced in 2008 was a disaster that saw the S&P dropped by about 50%. Rob said that today is different from what happened that year:
“2008 was very different. I think companies had very deep structural problems that prompted that [the market drop] to happen. Now, we’ve got the government getting in the way of it. At the end of the day, governments don’t necessarily impact earnings that much in the long run. In the short run, yes, but in the long run, not necessarily. At the end of the day, that’s a vastly different problem than Lehman Brothers or Bear Stearns going under.”
The drop on Monday happened in spite of a speech President Obama gave in response to the S&P’s downgrade of the government’s debt. The President said that the U.S. is still a AAA nation. I asked Rob if he agreed:
“When he started talking, the Dow was down about 400 and it ended up down about 600. This is what I think the American people want to hear from the President – they want him to be a little like Harry Truman. They want him to basically say, ‘We have a problem; we are going to fix it.’ Harry Truman was kind of the ‘buck stops here.’ The Dow thinks he’s still in denial. If he wants to think we’re a AAA nation, that’s great, but we’re not. That’s like a student complaining to his teacher, I should have gotten a ‘D’, you gave me an ‘F.’ The Republicans have plenty of blame; I’m not just throwing a stone at the President, I’m just saying that was the reason the market reaction was so bad to the speech.”
Planning for retirement
Many federal employees are undoubtedly worried about the latest market drop, especially if they are at or nearing retirement age. I asked Rob for his advice on allocation strategies investors might want to consider, especially as they get closer to retirement. Rob said he thought the proper allocation is one that takes the age of the investor into account over time. He called the principle the “lifecycle of investing” and described it as such:
“A good rule of thumb is to take someone’s age and subtract it from 100 and that is the amount that would go into stocks. So if someone is 65 and retiring, subtract 65 from 100, you would get 35% stocks, 65% bonds for the entire portfolio. TSP would be part of that and the investor probably has some outside funds. There are numerous other factors that would weigh in on that, such as income needs – maybe they may need more or less income than that allocation would allow. Maybe they are providing for a grandchild’s education or buying a vacation home and would need more cash on the side. Or any unique circumstances such as medical bills.”
Over-diversifying
Statistics from the TSP show that investors will often times put their holdings into both the Lifecycle funds as well as the regular funds. I asked Rob if he thought this was a good idea. He acknowledged that he does see investors do this and believes it’s a mistake because Lifecycle funds are designed to automatically diversify an investor’s money according to the lifecycle principle he outlined previously.
Rob said a better idea would be to diversify across different accounts. He said that often times, an investor will have a retirement plan like the TSP, so using a Lifecycle fund for this account makes sense. In a separate account outside of the TSP, the investor could mimic the allocation strategy most appropriate for his age in non-lifecycle funds or individual stocks. But he made it clear, buying both types of funds within the TSP is “defeating the purpose.”
Light at the end of the tunnel?
The Dow staged a 430 point rebound on Tuesday after the sell-off of the last few days and in the wake of the Fed’s announcement that it would keep interest rates low for at least two more years.
Will Rob’s prognosis prove correct, thus averting a bear market and exiting this correction? Tuesday seems to indicate that but it’s anybody’s guess where the market will take us from here.
And as a final note, remember that any investment decisions you make for yourself should always be done in consultation with a qualified financial planner.
