A Nasty January Surprise

A 3D rendered illustration of a bar graph on a white background showing a decline with a ornage arrow point downward

This has been a very tough week, both for investors and Powerball enthusiasts. In fact, it was the worst opening week in market history. Stocks plummeted approximately 6%, and the estimated Powerball jackpot ballooned to a whopping $1.3 billion.

My wife, Marea, has even caught the bug and told me that she was going out to purchase 10 tickets. I laughed and said, “All you’re doing is increasing our odds of winning from 1 in 292 million to 10 in 292 million. Statistically, we have a better chance of experiencing one of the following events than winning the Powerball jackpot:

Become an American billionaire

Be killed by an asteroid

Be struck by lightning while drowning

Become President of the United States.”

Marea thought about it for a moment, then looked me straight in the eye. “Okay. But, I figure I still have a better chance of winning Powerball than depending on you to not lose money in the stock market,” she said sarcastically.

Wow.

I was stunned by the insensitivity of that off-the-cuff remark, especially considering that her portfolio only generated a negative return of 0.37% in 2015—though that’s not bad, considering last year’s overall market performance.

 

Dow 2.23%
S&P 0.73%
NASDAQ 5.73%
International 3.30%
Emerging Markets 16.95%
Utilities 4.85%
Energy 21.12%
Crude oil 30.47%
Gold 10.46%
Long gov. bonds 1.11%
Short gov. bonds 0.16%
High yield bonds 4.03%

 

Then she said, “How did I do last week, Mr. Money Manager? Or, should I say, how much did I lose?”

“Hey, you only lost 2.2%!” I replied indignantly.

Only 2.2%? You lost more in a week than you did all of last year,” she responded.

“People lost over a trillion dollars this past week, and you only lost 2%!” I shot back. “Let me tell you something: that isn’t bad for a growth portfolio.”

She studied me for a moment, as if I had just said something absurd, laughed and headed for the door—probably ready to buy 20 tickets, now that her husband had proven to be such a financial failure. I have to give her credit for one thing: she’s certainly justified in her concern about the markets. To put last week’s plunge into some perspective, equities have historically gained an average of 8 to 10% annually. In order to achieve an 8% return for 2016 after losing 6% last week, stocks will need to generate a 14% return by the end of next December. Given the current environment, an 8% return seems like a real long shot.

Okay, so what cataclysmic events caused the drop? China, the Chinese Yuan, North Korea, the Iran/Saudi conflict, ISIS, oil prices, a possible Fed interest rate hike, the New England Patriots not securing the top playoff seed in the AFC, plus an overall slowdown of the global economy all funneled together to help kick off (no pun intended) a very unhappy start to the new year. Despite current market woes, it’s still important to search for positives. The U.S. economy continues to forge ahead, and new jobs are consistently being added to the marketplace.

So, will the U.S. market generate positive returns by the end of the year?

Time will tell, but in the meantime, here are some suggestions that may help you navigate through what may be an unstable investment period. If your time horizon is 10 years or more, I would ignore current events and save, save, save! Take advantage of pullbacks by contributing as much as possible to your 401k, HSA, and other investment options, such as annuities and life products.

Based on HealthView’s latest data, someone retiring in 10 years will need a total of $224,471 in today’s dollars ($444,815 in real dollars), just to cover health care, which represents around 33% of all retirement expenditures. Therefore, considering that many of us may live 25 years or more in retirement, I strongly suggest putting away as much as possible today so that you can enjoy a more financially stable future. For those expecting to retire in a couple of years, be prudent. Do I suggest moving into cash? No, but I do advocate hedging your bets, which means conservatively diversifying into stocks, bonds, and cash equivalents based on your personal risk-tolerance level. Also, don’t ignore life products or annuities with guarantees. With increased market volatility, asset allocation and diversified product mix becomes extremely important. Remember, annuities with guarantees did not expose investors to losses in 2015. Also, in case you were wondering, health care will cost you $189,223 in today’s dollars ($295,718 in real dollars), assuming that you are fully insured.

In times like these, I strongly recommend working with a financial professional. And maybe it wouldn’t hurt to follow Marea’s lead and buy a Powerball ticket or two.

One more thing: My little investment portfolio only lost 0.22% compared to Marea’s 0.37% loss. Can you imagine her reaction?

2016-01-13T10:45:50+00:00