facebook twitter instagram linkedin google youtube vimeo tumblr yelp rss email podcast blog search brokercheck brokercheck

If Not Now, Then When?

If Not Now, Then When?

            I’ve been managing money for a long time, 24 years to be exact.  When you do anything for that long, you start to develop a few extra senses that are hard to describe.  These senses nag at you as your brain absorbs information from research, observations, behavior, patterns, and other things that contribute to your perceptions about the future.  It’s like a De Ja Vu experience where you know what’s going to happen but you can’t explain why (or even justify it with current evidence).  For this update, I’m not going to provide a lot of evidence as much as simply describe what I’m feeling and sensing right now regarding a bunch of financial stuff.  Take it for what it’s worth, which could be nothing beyond experiential guesswork.

Stock Markets

            My overall sense here is that making money and keeping it, is going to be tough for the next 2-3 years.  This is a relative statement because for far too long now, investors have been rewarded for doing nothing, knowing nothing and simply owning any index.  As they say, don’t confuse brains with a bull market.  It’s a bull market and a long, tired one at that.  But the stock market landscape is stretched to the point of breaking with enormous performance differences recognized over the last 2-3 years.  Just in 2018, we’re seeing gains of 25% in select domestic indices/sectors while entire countries like China and Emerging Markets are approaching true bear market losses of -20%.    You’ve heard us talk about the historically wide spread between value and growth styles as another example.  I would add that gains coming from passive indexing relative to active managers have also never been wider.  When markets get this stretched in terms of winners and losers, my senses start tingling in an uncomfortable way. 

            Honestly, 2018 is going to be a crap shoot in terms of the final gains for the year and we really have no idea how things will shake out.   But my sense is that this will be one of the last years of this bull market one way or another. Returns looking forward will not come easily but they are available outside of passive indexing, outside of the US, perhaps outside of stocks.  We’re in that business of allocating client money in areas where real returns are both available and probable so I like our particular seat at this table and expect our relative performance to shine. 

Inflation, Interest Rates, Real Estate and Taxes

            I loved reading Trump’s finger waggling at Fed Chair Jay Powell this week.  Trump is apparently “not thrilled” to see the Fed raising rates and threatening the US economy.  I have news for Mr. Trump.  His policies are protectionist to the extreme and…. you know the rest of the sentence….. protectionism is….. INFLATIONARY.  His policies are directly driving inflation higher in our country and it’s just getting going now.  My sense is that most people are beginning to feel it and point to it.  The mouth is slightly open, eyebrows are angled in and down and we find ourselves saying things like “that’s ridiculous!”  Yes inflation is here and grossly understated in our country.  Consumers are buying things because they feel a bit more flush but it’s just now happening as prices are pushing beyond reach for everything including healthcare, housing, eating out, etc.  As anyone in my office knows, I’m really cheap.  I don’t buy expensive things.  But for years, it hasn’t been a problem as I could always find cheap stuff.

            Guess what, it’s now hard to find anything cheap outside of outlet malls selling last year’s clothing at heavily discounted prices in a race to see who can go bankrupt first.  Price inflation is everywhere and we all know and feel that.  Trump’s trade war is going to hurt our economy badly in the form of even higher prices and that comes home in 2019.  So Jay Powell has a tough choice.  He can raise rates in September, as he should to keep pricing in check and track with our fully employed economy with rising wages and inflation.   But in doing so, he’ll be parting ways with Trump and possibly his job.

            Real Estate pricing and activity is probably going to come to a screeching halt as well.   It already has in the truly overblown markets along the coasts and highflying cities like Vancouver. Pricing will become more attractive (read lower) as borrowing costs continue to go up especially for the segments of the market that rely on financing.  That might actually be a rosy assessment in the end.    But the window to shop for real estate is closed now as far as my senses suggest.  Today, we have high prices, rising borrowing costs (that are no longer deductible), sharply higher property taxes (also not deductible anymore) and a sellers market where buyers are still in bidding wars.  Does that sound or feel like a good time to buy?  I’d be a seller if anything.  I am now resetting the return bar for real estate.  I expect zero returns for real estate holdings in terms of price appreciation for the next 4-5 years.  The last time I said anything so unacceptable and unsavory was October of 2006 when I declared:

Real Estate will be DEAD MONEY for the next 10 years.

I was wrong, it was dead money for almost 11 years from that date. 

Again, this is just my sense.  What do I know?  But you can quote me in 2024.

            And finally, my sense on the recent Tax Reform Act is that many in our country are going to find themselves “not thrilled” with the changes in their tax liability when they finally get around to doing their taxes.  Those of us who make enough to have our deductions phased out completely and have to pay quarterly estimates already know that our taxes are going up with the new Tax act.  Many others are going to find out later, they just don’t know it yet.  When I made my last quarterly payment on June 15th, I actually got a little nauseous and got up from my chair.  It went away but it was close.  Sept 15th is coming soon.  When many people realize that the tax reform act was just a corporate tax give away and they see no changes (or an increase) in their tax liability, they are going to be pissed.  Taxes are just like inflation.  They are a silent killer of consumption and could be the catalyst for the beginning of a recession in 2019. 

If Not Now, Then When?

            So, if I pile up all of this extrasensory work and look at it through the eyes of your everyday retiree or someone sitting on a bunch of index funds or someone who is just trying to make ends meet, it feels like this is an obvious time to consider a few changes.  The idea is that we don’t want to be forced into making tough choices that have a negative affect on our lifestyle, standards of living or overall financial independence.  I don’t know the future anymore than the next guy, but my senses are firing that we’re approaching a period of time when good choices are going to be more scarce.  This is probably a time to ask and answer some tough questions that involve playing defense to protect what you have accumulated or generated in the way of returns.  I’ll give you a few examples.

Example #1 - If you are 2-3 years out from Retirement:

            You probably need to critically look at the holdings in your current retirement account (401k, profit sharing plan, etc) and at least measure your stock market exposure.  Everything in a 401k plan is an index fund regardless of the name of the fund mind you.  Here’s the question.  Is your financial independence and freedom to retire dependent on the current value of your 401k plan?  If so and you are within 2-3 years of retirement, under what conditions will you reduce your stock market exposure.  More to the point, if not now, then when?  Will you wait until the markets are down 10%, 15% 30%?  Most people don’t do anything until they are really hurting and recognize that they are seriously threatening their post work livelihood.  I’ll answer the question for you.  If you’re that close to retirement and own a portfolio of passive stock indexes as most do, you should begin cutting your exposure or get much more defensive than you are.   

            We can help you by looking at your current holdings, available options and recommend a reallocation of your important retirement account to add significant downside protection.  We charge exactly zero dollars and offer this as a courtesy service to anyone. You might even consider the option of an “In Service Withdrawal” of your 401k assets to an IRA rollover if your plan allows it (must be at least 59.5 years old).  There are many more investment choices inside an IRA rollover registration than your typical 401k plan offerings. This can happen without closing down your 401k plan and continue contributing up to your last day work in many cases!

Example #2 - If you have built up a significant position in a stock:

            We have seen this a lot in the last year.  Positions in Netflix, Facebook, Amazon, Apple etc that have appreciated enormously and might now represent an uncomfortable size of your total portfolio.  What do you do with that?  If you sell, you might generate a huge tax bill.  If you don’t, you could end up giving up a lot of your gains on the next downturn.  But what if it goes higher?  All good questions that need answers and a plan if you want to keep what you have made and exit the position over time, gracefully, at your discretion without a huge tax bill.  Again, I’ll ask the question:  If not now, then when – will you make a plan?  After the price of the security has fallen x%?  After it hits some arbitrary price?  I’ll answer the question.  The time to make a plan is now, not later when your options are limited. 

            Sean Powers, our new CIO, has a new programmatic solution for these situations using a new partner (Spider Rock Advisors) that offers an options overlay for highly concentrated stock positions.  Please contact us if you’re interested and Sean will explain in full detail.  It’s too complex for this forum.   

            To summarize, if I had to offer all investors one piece of advice, it would be this; Stay in the driver’s seat of your investments.  Remain in a position where you have good choices and options rather than making decisions under duress and panic.  This is the time where you have good choices to pick from in an environment that is going to become much more difficult.  If not now, then when will you act?  We’re here to help you make the right choices now.


Sam Jones