The stock market has traded in a fairly narrow range in recent weeks, holding its breath for a deal on the debt ceiling and for signs of oncoming recession. The market is also awaiting future Fed actions.
Bulls and bears have been in a standoff – debating whether a weaker economy will cause the Fed to cut rates and boost stock prices, or whether an oncoming recession will impact corporate earnings and employment, causing stocks to fall.
What does all of this mean to your retirement portfolio? And what actions – if any—should you be taking now, in this relatively quiet period. Is this the calm before the storm?
As of this writing, the S&P 500 broad market index is up around 9% for the year, but just 20 stocks — concentrated in tech — have accounted for 90% of those gains.
Did you pick the winning stocks – and will you know when to get out?
Trading stocks involves multiple decisions: when to get in, when to get out, and then when to get back in again! You have three times as many chances to be wrong, compared to the long-term investor.
Long Run Investing
Warren Buffett is a winning stock picker – and yet relatively few of his investments (with the notable long-term exception of Apple) are in the tech world. Yet he has consistently managed to slightly outperform the stock market with long term holdings. And most notably, in bear markets his portfolio has significantly outperformed the S&P 500, beating the broader index by a median of 14.89 percentage points in bear market declines.
Yet Buffet isn’t averse to keeping cash on the sidelines, waiting for better investment opportunities. As of year-end, 2022 his cash hoard had grown to $128.651 billion — up from nearly $109 billion in the third quarter.
Buffet’s Berkshire Hathaway stock has created great wealth for investors over the long run. His investment philosophy of seeking strong companies, with unique businesses, and good management has been a winning philosophy in good markets and bad.
Buffet makes successful investing look easy. But he is the exception that proves the rule!
Professional Fund Managers Fail
S&P/Dow Jones Indices has just released its year-end performance report for 2022. And to no one’s surprise, the new report shows that as in previous years, winning fund managers fail to repeat their out-performance in subsequent years. In fact, 51% of large-cap U.S. equity funds lagged the S&P 500® in 2022.
And time only makes the statistics worse! Only 5% of the above-median large-cap active equity funds in calendar year
2020 remained above the median in each of the two succeeding years. (S&P notes that if outperformance were random, they would expect a 25% repeat rate.)
Clearly, past performance is no guarantee of future results. Except, of course, if you’re Warren Buffett, who is truly exceptional!
How to Manage Your Portfolio
So that brings us back to your 40l(k) or IRA investments. If the highly paid money managers who spend full time watching stocks can’t put together long streaks of outperformance, should you be trying to do that? And do you really believe that you can find a broker/advisor/manager who can beat the market?
If the smart answer is no, then why pay management and fund fees to try? More importantly, what should you be doing?
Two simple answers: First, understand your own situation. If you’re young and investing in your retirement plan, history shows you don’t have to “beat” the market; you’ll do fine just investing in the low-cost S&P 500 stock market index fund, available in every retirement plan. Do it consistently and regularly, and history shows you’ll come out ahead in the long run – at least 20 years.
But, if you’re nearing or in retirement, you’ll need to sort out how much money you should have invested in the stock market versus cash “chicken money” that can earn at least 5% these days without risk of loss.
You still need some stock market exposure to help you keep up with future inflation, which stocks do over the long run. But not so much stock market exposure that it keeps you up at night!
These relatively quiet times are the perfect time to make that decision about stock market exposure. You’ve reached the point where you’re not so concerned about the return ON your money as the return OF your money!
And that’s The Savage Truth!