The FUD Factor at Record Highs

In November key market indexes hit record highs. Questions arose. Should I take some money off the table? Is the market poised for a pullback? Is it risky to invest when the market is so high?

 Such questions are symptomatic of a common human constraint—fear, uncertainty, and doubt—the FUD Factor. In March 2009 after U.S. stocks had fallen 51% and foreign stocks even further, the FUD Factor ran rampant through investors’ traumatized psyches.

 On March 9, 2009, the Dow Jones Industrial Average hit 6,547, its lowest close in 12 years. Warren Buffett proclaimed, “It fell off a cliff.” If  as a prognosticator I had said, “Don’t worry, be happy, by 2013 the Dow will close above 16,000,” most would have pegged me as delusional. Eschewing bargain prices in stocks, money flowed into bonds and bond funds.

 Now money is moving out of bonds and into stocks, driven by low interest rates and strong equity performance.  But the FUD Factor is back, angst over restrained forecasts for 2014. Logic says that the Dow will at some point hit 20,000. Why? Because America will continue to grow and equities, ownership interests in leading companies, will grow with it. But growth can spurt, stall, or go negative at various times. Progress in the stock market is not an escalator; it’s a trek through peaks and valleys. Investors fear a pullback, which we know will come. Those early in retirement or contemplating retirement fear another 2008, a plunge taking a 50% bite out of their apple, with little time to recover.

 The dilemma is more worrisome with interest rates low, producing losing returns net of inflation and taxation. Since bond values decline as interest rates rise, and the trend for interest rates points upward, risk management must be evaluated. If you are working and are confident of your income stream, you can take the risk of a downturn in the stock market. In fact, downturns are your long term friend if you are dollar-cost-averaging into a retirement plan.

 If you are retired or are about to be, how much money does it take to run you life, monthly, net of taxes? That number, minus non-portfolio income such as Social Security, pensions, etc., becomes your “paycheck fund.” Consider setting enough aside in a secure money market fund, say, three years or more of “monthly paychecks.” That provides time to let equities recover. Perhaps at some point it will make sense to ladder CDs and individually-held bonds as part of your Paycheck Fund.

 Tax strategies count as politicians seek to spread more of your money around. What assets belong in a tax-sheltered retirement plan or annuity, and what assets are best suited for taxable accounts where long-term capital gains can be captured? Can money be set aside to generate potential future gains taxed at favorable rates compared to ordinary income? Some real estate and other alternative investments offer the potential for cash flow and/or capital gains. How critical is liquidity to your investment strategy?

Annuities are controversial due to complexity and, in some cases, aggressive marketing. But there are contracts that can add guaranteed stability to lifetime income, or build future income streams based on guarantees combined with “equity or interest rate kickers.” These are seen as replacing some fixed income-based risk reduction strategies threatened by rising interest rates.

 Prognosticators are not projecting  the strong market performance of 2013 into 2014. One can find dour forecasts as well as “cautiously optimistic” opinions such as that of Warren Buffett who sees U.S. equity markets as valued “in a zone of  reasonableness.” (The Wall Street Journal, 11/23/13).

 An early mentor of mine said, “The best time to invest in stocks is when you have the money.” That has been my personal strategy, while  having adequate reserves to run my life while riding through ups and downs. Look forward to Dow 20,000. We just don’t know what will happen on the way to yet another record close!

 How to handle the FUD Factor? Have a solid financial plan that matches your vision of the future as you move to the next phase of your life. A plan creates confidence. Lack of planning creates confusion and procrastination, and, yes, fear, uncertainty, and doubt.

Lewis Walker is President of Walker Capital Management LLC. and Walker Capital Advisory Services, Inc., a Registered Investment Advisor (R.I.A.) Securities and certain advisory services offered through The Strategic Financial Alliance, Inc. (SFA).  Lewis Walker is a registered representative of SFA which is otherwise unaffiliated with the Walker Capital Companies. ▪ 3930 East Jones Bridge Road ▪ Suite 150 ▪ Peachtree Corners, GA 30092  ▪ 770-441-2603 ▪ lewisw@theinvestmentcoach.com