Should You Worry That the Stock Market Keeps Setting Records?

 

This is a good time to review your total investment portfolio, whether you own annuities or not. If you’re an average long-term investor – which means you have an investment mix of roughly 60% stocks and 40% bonds, and perhaps some annuities as well – you are probably a happy camper.

Stocks have been regularly setting new highs. Interest rates on bonds have risen since the election of Donald Trump, depressing their prices, but not really that much. Bond rates are up roughly 1 percentage point in the last six months, and in recent weeks have been slowly declining.

It doesn’t get much better than this. This raises the question of whether the good times will continue. Nobody can be sure, of course, but the prudent investor has to admit that the market is obviously closer to a peak than a trough, especially in the wake of an aging eight-year-old bull market, and that bond interest rates are more likely to rise than fall from here.

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The Shiller P/E ratio, named for Yale economics professor and Nobel Prize winner Robert Shiller, compares current prices to average earnings over the past 10 years, adjusted for inflation. It is pushing 30, the highest it has been seen 2002 and almost double its long-term average. Besides 2002, the only other time the ratio was so high was 1929 — the year of the infamous stock market crash that ushered in the Great Depression.

So what should a savvy investor do? To borrow a word from an earlier paragraph, be prudent.

No panic is necessary. The stock market will not fall off a cliff. But it is a good idea to move some money out of the market, in particular, and put it into a so-called alternative investment – one that doesn’t track the trajectory of stocks or bonds. Or, if you are a pre-retiree or retiree and have not already done so, it might be a good idea to buy an annuity offering guaranteed lifetime income. It’s all about weatherproofing your portfolio. And, in the case of annuities, it’s insuring that you have a supplemental income stream regardless of how markets perform.

One type of alternative investment is a Business Development Corporation (BDC), created by Congress in 1980 to help middle-market companies. It serves as a bank of sorts, lending money to a diversified mix of middle-market companies and sometimes investing in them. A number have produced very respectable returns. Another type of alternative investment are REITs and other types of real estate investments. Both follow a different path than stocks or bonds, enhancing diversification.

Annuities – for those who don’t already own them – are all about locking in guaranteed income streams, lifetime or otherwise. In effect, many are pensions, funded by insurance companies.

What makes annuities particularly attractive to the older set is that they mitigate or erase the fear of gyrating markets. Nobody likes a bear market. But it’s more unsettling if you’re retired and rely on your investments for most of your income. Annuities and alternative investments also sidestep so-called sequence of return risk, a fancy name for the fact that most retirees withdraw funds regularly from their retirement accounts — and that doing so in a down market pummels the chances of a rebound.

For those who like the stock market’s enviable long-term growth potential, a particularly attractive annuity today – if carefully selected – might be a fixed indexed annuity. These invest in an index, often the S&P 500, and do not mirror the full upside of index performance. On the other hand, a FIA, unlike the index, doesn’t lose value in a down market. Most are also sold with a provision of guaranteed lifetime income.

A FIA could be just what the doctor ordered today if you’re a long-term fan of the market but worry about today’s pricey stocks.

In a recent interview, Shiller told CNBC that it’s virtually impossible to accurately predict short-term market moves. But this doesn’t mean investors should do nothing, he added. “Current stock prices would suggest reducing your holdings of stocks, especially for a long-term investor,” Shiller said. “We can’t time the market accurately, but we know that when it’s this high, over the long term it usually doesn’t do great.”

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