Value of Long-term Investing in a Volatile Market with Specialized Indexes
The financial markets have been riding high for the past year. Despite the worldwide pandemic, it's only seen a few drops. Now's the time to adapt your investment strategy to survive and thrive in a volatile market. To do this, you'll need to ask a serious question about the current status and what the future may hold.
Will the market continue to increase in value, or is a significant drop on the horizon?
Depending on who you ask, you'll get a different answer. Most investment advisors can see the writing on the wall—We're in an overvalued market, and this can lead to a volatile market. But there's no reason to panic. A wealth and income planning consultant can guide you through your options for short and long-term investing so you can take advantage of the market's all-time high without getting gutted if the gains end on a not-so-pretty note.
Are We in a Volatile Market?
The short answer—Yes. The market is extremely overinflated, and much of the financial world is unprepared to handle it. Many investors are taking the current market at face value and not researching
beyond that point. This situation is normal. Brokers don't do the same in-depth analysis as investment advisors.
What's not normal is the inequality. While Wall Street is riding high, people and businesses are hurting. The high unemployment and reduced earnings across the board for most industries indicate an overvalued market that will see significant losses for investors in the coming months.
The current situation with COVID-19, high unemployment, business closings, and even the political climate the country has faced over the past few years cause fluctuations. Even somewhat seemingly minor events can cause quick jumps and steep drops, such as company announcements, weather, and analysis from top financial experts.
As you can see, the last few years have thrown a lot at the market.
Another problem that's keeping the market volatile is the uncertainty of the future. We don't know what jobs aren't coming back. But investors can't look at all the losses and assume they'll return. Yes, some businesses have closed for good because of the pandemic. However, new companies will replace the old ones.
Then there's the question of all the people that rushed to the suburbs from cities to buy homes. Will they come back to the urban areas? If so, what will that do to the rural areas that grew at the highest rates ever over the past year?
Again, people looking at face value are only seeing dollar signs. But at the snap of your fingers, that can all change. If you don't have a financial advisor and a plan in motion to steer through a volatile market, you could lose money by selling too soon or lose even more of your portfolio by not selling soon enough. These don't have to be your only two options.
The Pitfalls of an Overvalued Market
An overvalued market is dangerous to your bottom line.
It's not hard to see that there's something wrong with the market when 16 million Americans are filing for unemployment and the stocks have their best week in more than 40 years. Initial reactions from experts were that the brokers and investors hadn't fully grasped the devastation
that COVID-19 had unleashed or how much worse it would get before it was over.
But here we are nearly a year later, and caution is still being thrown to the wind. The market dipped 20.3% from February 12, 2020, to March 11, 2020. What looked like a pending Bear market was going to end the longest-running Bull market in history. It scared investors and regulators alike. Soon after, in March, the U.S. Government sank $2 trillion
into the Coronavirus Aid, Relief, and Economic Security (CARES) Act.
There is a greater picture to look at with the overvalued market and what is on the horizon. Value traps are enormous right now and have been for the past several months. The stocks that have seen huge jumps have a direct connection to the pandemic and lockdowns.
Companies won't need stockpiles of syringes, cleaning supplies, and facemasks two years from now. In fact, it's possible they won't be necessary more than another year. All the companies that popped up with stylish masks will be irrelevant as the necessity dries up.
A similar situation is going to happen with several industries. Yes, work-from-home for many jobs and employers is here to stay. Too many employees and companies have found a way to save money and, in many cases, boost employee productivity and happiness. Not enough people will continue to work virtually to sustain the growth some industries have seen, such as Door Dash.
Additionally, as people ditch masks, return to work, and begin traveling again, the industries that took hard hits the past 12 months will come back, as they always do following a downturn in the economy. This includes construction, automobile manufacturing, and travel-related businesses, such as hotels, amusement parks, and of course, cruises and airlines.
Federal Stimulus Payments: Good or Bad for the Stock Market?
A stimulus is good for the economy and the people, including low- and -middle-income wage earners, small businesses, and state and local governments. That positivity doesn't extend to the stock market. The increase in the national debt from 2008 and now again in 2020 and 2021 is enormous and will have repercussions for the financial market as it recovers.
The government is playing high-stakes poker with the financial market and economy. Even without the
$1.9 billion stimulus package in the works, the national debt is about to overtake the country's GDP
for the first time in history. As you may guess, that's not good for the economy or America's credit rating. Hugh Johnson, a long-time market strategist, told Yahoo Finance Live he estimated stocks were 8.5% overvalued
before the last federal stimulus.
The same analysis from December reported that S&P 500 earnings were expected to jump 23%
year-over-year in 2021. But they also acknowledged that without the significant stimulus promised in early December, the economy and stocks' growth numbers would be much lower.
Government officials understand the overvaluation issue. But they're also stuck between a rock and a hard place. Large businesses don't need the money as much as small companies and low and
Steve Blitz, Chief US Economist for TS Lombard, explained to MarketWatch
in September 2020,
"The burden is more on the people making $14 an hour than those making $40 an hour … The
$14-an-hour people are only responsible for 9% of consumer spending. And the top 40% have had a lifestyle change, but their lives haven’t changed, and their balance sheets are bigger than they were at the beginning of the crisis."
And experts have pointed out that low- to mid-sized income earners will spend the money on bills and buying things they need, which helps the economy. For example, landlords will get paid, and in turn, they'll pay bills and improve their properties.
Higher-income earners that don't need the money will save it or invest it, which doesn't help the economy. Instead, it boosts the market more.
History shows that the stimulus payments caused the market six years to return to pre-2008 levels before the Great Recession. Investors that use a long-term investment strategy can ride out the downturns that will occur before the market rights itself again. Given the payments' size, some experts say it could be a decade before we see a return to the pre-2020 numbers.
What is the Impact of the 2020 Federal Stimulus Check?
The 2020 federal stimulus plan is different from previous infusions from the government. Typical stimulus legislation
promotes recovery through job creation, advancing infrastructure, and social programs that help people and families in financial crisis.
In the First New Deal from 1933-1934 and The Second New Deal from 1935-1936, and the second stimulus in the Great Recession of 2008, these goals were achieved.
On the other hand, the first bill for recovery in 2008 was cash infusion to low and middle-class households. 2020 threw the old model out the window. The pandemic shuttered tens of thousands of businesses and left millions of people across the country unemployed.
There are two things clear about the 2020 stimulus. Most of the funds went to large companies that didn't do anything to bring the economy back. It also pushed the market into hyperinflation, with the most damage occurring for small and medium-sized businesses.
A report from the Seattle Times in December 2020
shows 600 large companies, including national chains, received the maximum Paycheck Protection Loan of $10 million. When called out on it shortly before summer 2020, many of the businesses returned the money. Ones that didn't include:
In San Antonio, Muy Brands Inc., the franchisee, owns over 750 Taco Bell, Pizza Hut, and Wendy's restaurants received between $15 and $30 million.
American Media got up to $5 million.
First Baptist Dallas, a megachurch, saved 300 jobs with a $2 million loan to $5 million.
Artist Jeff Koons, a sculpture with 53 employees that earned $91 million in 2019 from a single sale, was approved for $1 to $2 million in loans.
The "loans" don't have to be paid back if they retain the workers and keep people off unemployment.
But the funding was intended for small businesses. Many large companies were able to stay open, such as Walmart. Church attendance in Texas was never prohibited. Media companies didn't go off the air. In fact, with more people home than ever, ratings soared, as did subscriptions
Beth Ann Bovino, a U.S. chief economist at Standard & Poor's, explains to CBS News in July 2020
"It didn't reach the industries that needed it, and it looked like it didn't reach the states that were hardest hit."
Will Another Federal Stimulus Check in 2021 Correct the Market?
The $1.9 trillion stimulus package will be the biggest America's ever seen. The money is necessary for the hundreds of thousands of small to mid-sized businesses and the millions of American's out of work. But it won't come without consequences.
Strategist Michael J. Wilson advises Forbes Magazine in a January 2021 article,
"With global GDP output already back to pre-pandemic levels and the economy not yet even close to fully reopened, we think the risk for more acute price spikes is greater than appreciated."
As for the market's response? As Mr. Wilson points out, it's going to make the divide between the reality of the economy and stock values more significant. The overinflated market will get worse. It's almost certain that a drop is coming. There's no way of knowing how far it will drop or how often. It could be a series of losses that add up significantly.
As mentioned above, you can make it safely through a volatile market without selling and still taking advantage of the highest gains stocks have seen in history. Rather than taking a step backward, look forward with long-term investing. There have been ups and downs in the financial markets throughout its history.
It's common for investors to see the coming federal stimulus package as another win that will keep the numbers blowing away market speculation. But the truth is, as explained earlier, the financial market is uncertain right now. Some financial planners and brokers might advise you to sell before the crash comes so you can come out ahead.
There are ways to stay in the game without losing all your gains.
Why Choose Specialized Indexes?
Specialized indexes are private investments that offer more security than a standard index on the market. The deregulation of Wall Street and other financial markets in the U.S. since 1980 has led to investments that carry few protections, which negatively increases the investor's risk. In a volatile market, this could leave you with huge losses and nothing to show for the most significant gains in history.
Specialized indexess are designed for simplicity. The all-in-one investment was created by Jack Bogle
nearly 50 years ago. He intended to help everyday investors compete with the pros on Wall Street.
All the stocks are in the index, so there's no need to research individual stocks. This single adjustment saves investors money that they can use for further investments. The index does all that work. With the market hitting regular highs, these privately managed funds see the same increases without the extra expense.
Reports show the average expense ratio
of passive funds was 0.15% in 2018 and active funds were more than triple at 0.67%.
There are over 100 indices and several types of specialized indexes. The most common that we work with include,
★ Standard & Poor's 500
★ AQR Funds
★ The J.P. Morgan Mozaic II Index
★ BNP PARIBAS
★ Alliance Berstein
★ Down Jones
There are a few reasons to choose this route for financial planning. Specialized indexes are a
tax-deferred form of passive investing that's low cost and diverse. Diversified investments are a simple solution for riding out a potential downturn, whether it's a Bear Market or a market correction. It goes along with the old saying, "Never put all your eggs in one basket."
Along with being tax-deferred, the longer you hold onto the stocks, the less you'll pay on the gain. That's because the IRS encourages long-term investing strategies through tax incentives that offer investors significant savings!
There's no shortage of professionals looking to guide you through a volatile market with your investment strategy. However, it's essential to choose the right person. Some investors think a stockbroker and financial planner or retirement planner are the same positions.
However, a financial planner can do much more for you than a broker. The advisor's responsibility is to their clients. Most brokers work for a firm and have fewer requirements to work within for their role.
A financial planner offers comprehensive advice and services to help investors with strategy and navigate market risks through short- and long-term investing plans. Additionally, they guide retirement planning and tax management. Most importantly, they specialize in getting clients through an overvalued market and through the ups and downs of market corrections and various changes, such as slowdowns and situations that disrupt it like COVID-19 and high unemployment. Your time-line to your desired goal is solely dependent on the market’s ability to adjust to positive and adverse market conditions.
Learn more about how Wise Wealth Income Solutions for Entrepreneurs (WISE) can help you increase your portfolio during a volatile market through specialized index investments. We use our knowledge of the market and guide you through a profitable investment strategy and secure your wealth and retirement. Today is the perfect time to lock in gains at the market's highest point ever. Your time-line in this approach is much more likely to hit the mark, as your principal is not subject to market loss.