At the time of writing, the market has recently begun to nosedive in response to news of the Federal stimulus coming to an end, the troubled financial state in the EU, and other influences.
I am of the opinion that the market will continue to deteriorate to counter balance the unprecedented market surge brought on by the Federal Stimulus, especially as the market's correction was almost solely based upon quantitative easing.
How far the market will fall remains to be seen; however, I feel that it will be significantly greater than a 15% correction. In October 2014 the Federal stimulus, known as quantitative easing, is ending with a Federal balance of $4.4 trillion dollars (not including interest). If it took trillions of dollars to inflate the market, what do you think is going to happen when it is taken away?
In the wake of the 2008 financial meltdown, the Federal Government was forced to act with an initial bailout of $800 billion to prevent a “Financial Armageddon.” Now, six years later, we have trillions added to our deficit due to quantitative easing. Granted, the Federal stimulus did protect the market from imploding in the short term, pulling the market up to record-setting levels; however we are now walking into the long term consequences of this act of socialism.
This is because both investors and the market alike have become complacent about the Fed purchasing trillions of dollars of bonds to artificially create a solid foundation under the market.
Now, with the foundation likely to stop being laid out or maintained, the market will have to wean itself off of this government intervention. This could be a blessing or a curse depending on the moves you make during this time.
If the market does take a significant drop, no one can say they didn't see it coming. This was not the case in the latter part of 2007 at the start of the Great Recession. The difference being that you can lock in your gains to make sure you don't ever take a step backwards. What many fail to realize is that if a percentage loss is immediately followed by the same percentage gain you will still end up losing value.
Think of it this way...
If four quarters (one dollar) lose 50% of their value, you have two quarters left over. If you then immediately apply a 50% gain back to the two quarters, you only increase by a single quarter and still finish up one quarter short. This is why it is crucial to lock in your gains to ensure you never take a step backwards, especially if you are dependent upon that money to live on during retirement.
However, parking your portfolio in cash over the next couple of years to weather the storm will still set you back. This is because most money market accounts will pay less than .01% interest, which usually equates to pennies of interest earned in a year, basically pausing your momentum. Instead, it is important to look at your long term goals, making sure that your momentum is never disturbed by market downturns.
The more momentum you have moving forward, the better position you will be in the long term.
When the market crashed in 2008, the Dow Jones was just over 14,000. At the lowest point of the recession, on March 5th, 2009, the market hit 6,594. At that point investors were in a state of shock, realizing what they had lost in just over a year. Because of the $4.4 trillion the government added to our deficit, the market soared to new highs, breathing hope back into both investors and Wall Street.
And yet, even though the market reached record levels, investors distrusted the reality of the situation and they turned to the Fed as insurance from volatility, conveniently turning a blind eye to the reality that the Federal Stimulus would end one day.
Well, here we are, with the Federal Stimulus coming to an end. The NASDAQ has already been officially categorized as being in a correction with pretty much everyone expecting more losses. Many recent articles are saying “Don't panic, stay the course,” or “We are still way ahead and corrections are natural.” I could not disagree more. The writing is on the wall, meaning if the market does take a big hit there was plenty of warning.
If you do not have a pension, you are responsible for taking care of your own retirement instead of looking back and pointing fingers. Added to which, if the market does take a big hit, you may have to work for several more years to make retirement a reality. There are, however, several variations of safe money options to make sure that your financial interests are covered moving forward, regardless of the Texas two-step the Fed is playing with Wall Street.
One of the most viable safe money options falls within a strategy of “indexing,” where many top-rated insurance companies will absorb all market losses in exchange for a variety of capped interest options paid out monthly or annually. Many of these insurance companies are the same ones that serviced and backed the pensions of the past and have recently redirected their interests.
Now, instead of the insurance company backing an employer's pension (group annuities), they have shifted the benefits to the consumer in the form of fixed indexed annuities (FIA). These FIAs usually come equipped with lifetime income benefits that can easily be used as an alternative to the pensions of the past. These income payouts can be stopped and started at the owner's discretion while still allowing access to the cash value.
Over the last 15 years these strategies have performed stride-for-stride with the market without any Federal Government bailouts while having explicit guarantees. In fact, many of these lifetime income payouts can be structured to increase over the years as the market increases (while also never decreasing), showing impressive payouts.
Moving forward, investors can choose to stay the course, putting their money into cash or money markets with near zero returns, or they can look to other strategies to protect their long-term interests. Whatever choice they make, I believe they should be aware of the volatility coming around the corner from the weaning of the Federal Stimulus.
The bottom line? Our global economy is not in a position to perform anywhere close to that which our over-performing market suggests. Once again, the writing is on the wall and it is up to you to decide how to prepare for this.
