Atlantic Capital Management

Atlantic Capital Management (79)

Wednesday, 10 August 2016 14:23

Sometimes the Pundits Get It Wrong

Written by

In fact, many predictions about Wall Street have misread the market’s direction.

Trying to determine how Wall Street will behave next week, next month, or next year is difficult. Some feel it is impossible. To predict the near-term direction of the market, you may also need to predict upcoming earnings seasons, central bank policy moves, and the direction of both the domestic and global economy. You might as well forecast the future of the world.

That is not to say forecasting is useless. You could even argue that it is a necessity. Every month, economists are polled by various news outlets that publish their median forecasts for hiring, inflation, personal spending, and other economic indicators. Those median forecasts are often close to the mark, and sometimes exactly right.

Figuring out what lies ahead for equities, however, is often a guessing game. Looking back, some very bold predictions have been made for the market – some way off the mark.

Dow 30,000! More than a decade ago, a few analysts boldly forecast that the Dow Jones Industrial Average would climb to astonishing heights – heights the index has yet to reach today.

The first was investment manager Harry Dent, who, to his credit, had written a book called Great Boom Ahead predicting an amazing run for both the economy and the market starting in the mid-1990s. (Indeed, the S&P 500 averaged a yearly gain of almost 29% during 1995-99.) Dent’s 1999 bestseller, The Roaring 2000s, posited that the Dow would top 30,000, perhaps 35,000 in the near future as maturing baby boomers poured money into equities. He was wrong. What happened instead was the so-called “lost decade,” in which the broad market basically did not advance. As for the Dow 30, it ended the 2000s at 11,497.12.1,2

As a money manager, Robert Zuccaro had been part of a team that had realized triple-digit annual returns in the late 1990s. He put out a book soon afterward called Dow 30,000 by 2008: Why It’s Different This Time. (As the market cratered in 2008, you might say his timing was bad.) Analysts James K. Glassman and Kevin A. Hassett authored a volume called Dow 36,000: The New Strategy for Profiting from the Coming Rise in the Stock Market. It came out in 2000, and also proved overly optimistic.2,3

Dow 3,300! Harry Dent changed his outlook over time. In 2011, he told the Tampa Bay Times that the blue chips would plunge to that dismal level by 2014 or earlier. The Dow finished 2014 at 17,823.07. For the record, Dent now sees a “bubble collapse” starting in 2016 or 2017, soon breeding “widespread civil unrest” in America.2,4

Sell your shares now! In “Bearish on America,” a 1993 Forbes cover story, Morgan Stanley analyst Barton Biggs urged investors to dump their domestic shares en masse in light of the economic policies favored by a new presidential administration. The compound return of the S&P 500 over the next seven years: 18.5%.5

The market is done, no one believes in it! Perhaps the most famous doomsday call of all time occurred in 1979 when Business Week published a cover story entitled “The Death of Equities.” Wall Street was emerging from its second awful bear market in less than seven years. The article cited a widespread loss of faith among investors, asserting that “the death of equities is a near permanent condition.” Equities, so to speak, soon proved very much alive: the S&P 500 returned 21.55% in 1982, 22.56% in 1983, 6.27% in 1984, 31.73% in 1985, and 18.67% in 1986.5,6

Recession ahead, the market points the way! Can the behavior of the market foretell a recession? Is there a causal relationship between a down or sideways market and an oncoming economic slump? Some analysts see little or no link. Fifty years ago in Newsweek, the noted economist Paul Samuelson wrote that the equity markets had “forecast nine of the past five recessions.” He was being sardonic, but he had a point. Looking back from 2016 to 1945, Wall Street has seen 13 bear markets, only seven of which (53%) have seen a recession begin within about a year of their onset.7,8

Take the words of the pundits with a grain of salt. Some have been right, but many have been wrong. While the most radical market predictions may make good copy, they may also lead investors to take bad advice.5

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Citations.
1 - cbsnews.com/news/harry-dent-and-the-chamber-of-poor-returns/ [8/19/13]
2 - finance.yahoo.com/q/hp?s=^DJI&a=11&b=29&c=1999&d=11&e=31&f=2014&g=d [6/2/16]
3 - dividend.com/how-to-invest/10-hilariously-wrong-bullbear-calls/ [1/19/15]
4 - tampabay.com/news/business/markets/economic-naysayers-including-tampas-harry-dent-are-back-with-fresh-reports/2270981 [3/28/16]
5 - forbes.com/sites/katestalter/2015/09/14/6-doomsday-predictions-that-were-dead-wrong-about-the-market/ [9/14/15]
6 - forbes.com/sites/oppenheimerfunds/2014/01/23/clues-from-the-80s-bull-run/ [1/23/14]
7 - cnbc.com/2016/02/04/can-the-markets-predict-recessions-what-we-found-out.html [2/4/16]
8 - blogs.wsj.com/economics/2013/10/03/plunging-stock-prices-are-good-recession-predictor/ [10/3/13]

Thursday, 04 August 2016 17:09

How Can You Make Your Retirement Money Last?

Written by

These spending and investing precepts may encourage its longevity.

All retirees want their money to last a lifetime. There is no guarantee it will, but, in pursuit of that goal, households may want to adopt a couple of spending and investing precepts.

One precept: observing the 4% rule. This classic retirement planning principle works as follows: a retiree household withdraws 4% of its amassed retirement savings in year one of retirement, and withdraws 4% plus a little more every year thereafter – that is, the annual withdrawals are gradually adjusted upward from the base 4% amount in response to inflation.

The 4% rule was first formulated back in the 1990s by an influential financial planner named William Bengen. He was trying to figure out the “safest” withdrawal rate for a retiree; one that could theoretically allow his or her savings to hold up for 30 years given certain conditions (more about those conditions in a moment). Bengen ran various 30-year scenarios using different withdrawal rates in relation to historical market returns, and concluded that a 4% withdrawal rate (adjusted incrementally for inflation) made the most sense.1

For the 4% rule to “work,” two fundamental conditions must be met. One, the retiree has to invest in a way that will allow his or her retirement savings to grow along with inflation. Two, there must not be a sideways or bear market occurring.1

As sideways and bear markets have not been the historical norm, following the 4% rule could be wise indeed in a favorable market climate. Michael Kitces, another influential financial planner, has noted that, historically, a retiree strictly observing the 4% rule would have doubled his or her starting principal at the end of 30 years more than two-thirds of the time.1

In today’s low-yield environment, the 4% rule has its critics. They argue that a 3% withdrawal rate gives a retiree a better prospect for sustaining invested assets over 30 years. In addition, retiree households are not always able to strictly follow a 3% or 4% withdrawal rate. Dividends and Required Minimum Distributions may effectively increase the yearly withdrawal. Retirees should review their income sources and income prospects with the help of a financial professional to determine what withdrawal percentage is appropriate given their particular income needs and their need for long-term financial stability.

Another precept: adopting a “bucketing” approach. In this strategy, a retiree household assigns one-third of its savings to equities, one-third of its savings to fixed-income investments, and another third of its savings to cash. Each of these “buckets” has a different function.

The cash bucket is simply an emergency fund stocked with money that represents the equivalent of 2-3 years of income the household does not receive as a result of pensions or similarly scheduled payouts. In other words, if a couple gets $35,000 a year from Social Security and needs $55,000 a year to live comfortably, the cash bucket should hold $40,000-60,000.

The household replenishes the cash bucket over time with investment returns from the equities and fixed-income buckets. Overall, the household should invest with the priority of growing its money; though the investment approach could tilt conservative if the individual or couple has little tolerance for risk.

Since growth investing is an objective of the bucket approach, equity investments are bought and held. Examining history, that is not a bad idea: the S&P 500 has never returned negative over a 15-year period. In fact, it would have returned 6.5% for a hypothetical buy-and-hold investor across its worst 15-year stretch in recent memory – the 15 years ending in March 2009, when it bottomed out in the last bear market.2

Assets in the fixed-income bucket may be invested as conservatively as the household wishes. Some fixed-income investments are more conservative than others – which is to say, some are less affected by fluctuations in interest rates and Wall Street turbulence than others. While the most conservative, fixed-income investments are currently yielding very little, they may yield more in the future as interest rates presumably continue to rise.

There has been great concern over what rising interest rates will do to this investment class, but, if history is any guide, short-term pain may be alleviated by ultimately greater yields. Last December, Vanguard Group projected that, if the Federal Reserve gradually raised the benchmark interest rate to 2.0% across the three-and-a-half years ending in July 2019, a typical investment fund containing intermediate-term fixed-income securities would suffer a -0.15% total return for 2016, but return positively in the following years.3

Avoid overspending and invest with growth in mind. That is the basic message from all this, and, while following that simple instruction is not guaranteed to make your retirement savings last a lifetime, it may help you to sustain those savings for the long run.

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Citations.
1 - money.cnn.com/2016/04/20/retirement/retirement-4-rule/ [4/20/16]
2 - time.com/money/4161045/retirement-income/ [5/22/16]
3 - tinyurl.com/hjfggnp [12/2/15]

Our Blog

2017

(10 articles)

2016

(24 articles)

2015

(15 articles)

2014

(18 articles)

2013

(12 articles)

2012

(3 articles)