A volatile stock market l Insightful Investing
Last updated 3/14/2018 at Noon
Volatility has returned to the stock market. What does this mean? Let me put it simply. Go down to the Mukilteo beach on any given variety of days.
Some days Puget Sound is pancake flat, and some days there are white caps.
The distance between the bottom and top of the wave is volatility.
In other words, when applied to the stock market, it is the distance a market will travel in any given time frame.
Advisors and investors are always trying to figure out the cause of volatility.
It is my opinion that our economic world is so complex that sometimes it is very difficult to tell why markets are volatile until months or years later.
Some observers attribute the volatility to the recent increase in interest rates, an over extended market, and high frequency trading algorithms.
As Walter Hellwig said, “The drop in the morning was caused by humans, but the free fall in the afternoon was caused by machines.”
In February, the markets were very volatile and March has continued this trend.
I think it is somewhat easy to see this time around, with the Federal Reserve being on record as saying that there are going to be a number of rate increases this year.
For almost 20 years we have had a bull market in bond prices.
And with interest rates at the lowest points in my short 30-year career, it only stands to reason that rates will eventually need to go back up.
And the impact of rates going up is a watershed event in the investing world and everyone knows it.
What everyone doesn’t know is how fast rates will rise and how far they will go.
Volatility has returned because investors are moving their money around to take advantage of how they think this will play out.
I have often asked this question to people: What would you rather have? A 30-year investment in a government bond that pays 3 percent, or an individual stock with a non-guaranteed payment of 4 percent that you owned for 30 years? Which investment would you rather have?
Warren Buffet was on CNBC this last week. After the Berkshire Hathaway annual meeting he always sits down with “Squawk Box” and answers questions.
He said, "If you had to choose between buying long-term bonds or equities, I would choose equities in a minute. If I were going to own a 30-year government bond or own equities for 30 years, I think equities will considerably outperform that 30-year bond.”
I am in total agreement with this basic sentiment, largely because I know that inflation and taxes are going to rise over time.
On Feb. 27, my oldest daughter had a baby. It was our fourth grandchild and third in the last seven months.
I am not sure what the hospital bill came to.
In my office, I have the hospital record of my mother’s hospital bill from the day I was born on May 17, 1954.
She kept it and gave it to me a few years ago. I had it framed.
It is written in pencil on an accountant-type ledger page.
My mother was in the hospital for four days.
It cost her $58 dollars for the room, $7.50 for lab results, $3.25 for drugs, $30 for maternity (whatever that is), $5 for administration, $16 because I was a boy, $4 to circumcise me, and $1.75 for x-rays.
My mothers total hospital bill for four days in the hospital was $125.50.
I would say that was quite a bargain. And I would say it is probably a lot more expensive today to have a baby.
With this one event, interest rates rising is a major issue.
Major as in maybe the biggest investing issue you have ever faced.
The fears in the market right now are interest rate increases and inflation.
I am not an economist and I don’t have a crystal ball.
Simple math tells me the impact on a bond portfolio could be substantial.
And then we have fiscal policy. The policies the government naturally produces.
A smart businessperson navigates the waters of volatility with great care.
It is my opinion that it is a mistake to just sit back and go for a ride.
What starts out as a 3-hour cruise could turn into Gilligan's Island if you are not careful.
I was taught years ago that the stock market climbs a wall of worry.
And it has been my experience that our system of capitalism does a pretty good job of climbing that wall.
Our system lends itself to people who can anticipate and solve very complex problems.
Yet, it is my opinion you should take a real hard look at your circumstances and make sure you have the right course plotted for increased uncertainty and volatility.
The investing world has been calm for a long time.
Last month may be an indication of things to come.
If you have been around for more than a few months, you know that Puget Sound is spectacular to look at.
There are plenty of glassy mirror flat-water days, and plenty of white caps too.
#Jeffrey Moormeier of JG Moormeier Financial is a Mukilteo-based financial advisor affiliated with KMS Financial Services, an SEC registered investment adviser. His column does not represent the opinions of KMS Financial Services, nor is it an official prediction or recommendation of any kind. The opinions expressed in this column are generalizations. For advise catered to your specific financial circumstances, contact Jeff directly at firstname.lastname@example.org or 425-931-8898.#