When it comes to money, I’m pretty conservative. And when it comes to investing, I’m downright paranoid.
Yes, I’m willing to take risks. Occasionally, I’ll even take a big one if the payoff is really worth it.
But overall, I believe in Warren Buffett’s first rule of investing — “Don’t lose money.” (This also happens to be his second rule of investing.)
This is precisely why I’m not all that excited by stocks or bonds right now.
Sure, we are starting four years under a business-friendly president. No doubt a Republican-controlled Congress will be wind in his sails, too.
However, this is precisely why the S&P 500 has ALREADY had a very sharp post-election rally.
And that’s just been the latest surge in a bull market that is already the second-oldest in history …
As this bull market approaches its eighth year, can the good times continue?
Most Wall Street prognosticators have answered in the affirmative.
UBS analyst Julian Emanuel says the S&P 500 will hit 2,300 by year-end. JPMorgan’s Dubravko Lakos-Bujas has issued a similar target. Analysts from Citi and Deutsche Bank are even more bullish, calling for 2,325 and 2,350, respectively. While none of those predictions imply massive gains, they keep returns positive for 2017.
Still, WHY should stocks continue to go higher? What fundamental developments haven’t yet been priced in?
The S&P 500 is now trading at roughly 21 times last year’s earnings (though not all results are in yet, obviously). That’s about the highest level since 2002.
If we’re about to see a new round of corporate earnings growth, this makes sense.
However, I’m not clear where that growth is going to come from.
I don’t believe it will come from infrastructure spending.
I don’t believe it will come from a major new technological boom out of Silicon Valley.
And I don’t believe it will come from surging demand in overseas markets that are struggling to stay afloat.
I’m failing to see where it will come from at all. Therefore, I’d bet we’re closer to a top than a new basecamp when it comes to equities.
No doubt I could be wrong, and I hope I am. But as I explained last month, I recently told my dad to take more than $54,000 in banked profits off the table … and for my Income Superstars newsletter, I am keeping my recommendations to tried-and-true investments that can survive market downdrafts and kick off dividends during periods of limited upside.
Now, let’s look at bonds.
We’ve already seen some air come out of fixed-income, which makes sense given a couple of interest-rate hikes. However, that cycle has probably just begun. Or at the very least, rates can’t reverse course very far.
Do I want to lock in current bond yields for 10, 20 or 30 years? Not in a big way. Maybe for a small portion of a portfolio as a hedge and safety net. I would also continue to focus on more niche categories like GNMAs, TIPS, etc.
It’s also worth reiterating that I don’t just see poor upside catalysts. I also see plenty of potential threats that most other investors seem to be ignoring.
Misguided government policies are just one of those things.
Look at what recently happened in India: Literally overnight, common forms of cash became illegal. People were forced to change their bills for new ones by a certain deadline. ATM withdrawals were restricted. Bank lines were long. And for many people living in a cash-based economy, chaos ensued. I’ve read accounts of rural citizens who couldn’t buy food at their markets, even one who died because there was no way to pay for needed healthcare.
There are also less-extreme examples already playing out in more-industrialized areas. The European Union has banned 500-euro notes. Australia has a goal of becoming cash-free by 2022. Even in the United States, there has been plenty of talk about doing away with $100 bills.
Speaking of Europe, we still have the very real possibility that the entire European Union will fall apart — which carries all sorts of implications to currencies, global trade and the entire financial system.
We also can’t rule out the possibility of a new — and serious — geopolitical event. Saber-rattling from North Korea, increased tensions with China and other rumblings all bring some concerns in 2017 and beyond.
While gold and silver don’t offer perfect protection against these possibilities, they offer more than most. That’s why I also think a small allocation to precious metals can make a lot of sense for many portfolios … even if these non-income-bearing investments are outside my usual realm of coverage.
In short, I see relatively expensive investment valuations … few upside catalysts … and a lot of risk that isn’t priced in at all right now.
But hey, maybe I’m just paranoid.