The Biggest Blunder Investors are Making Right Now

Mike Desepoli, Heritage

It’s not all their fault, though, as information is often dumbed down in the interest of simplicity. As Einstein said: “Everything should be made as simple as possible but not simpler.”

Unfortunately, often the information provided to average investors has been simplified below the bare minimum. To avoid the blunder, average investors need a bit of sophistication.

To fully understand how to avoid the blunder, let us first illustrate the point. Read on for the blunder and how to avoid it.

The dirty little secret

Many average investors believe the myth that bonds are safe. There is some truth to the understanding that bonds are safer than stocks, but average investors miss an important nuance. If you buy an individual Treasury bond or a bond of a company with a solid balance sheet and hold it to maturity, you will get your principal back. However, this is not the case when you buy mutual funds or ETFs.

Asset Allocation? What asset allocation

Many average do it yourselfers are advised to start with 60% in stocks and 40% in bonds. Of course, adjustments are made based on age and objectives. Investors are told that stocks are for growth and bonds are for safety and income. Many average investors do not understand that they can lose a lot of money in bonds.

All good things come to an end

Bonds have been in a 30-year bull market. For this reason, the bad advice given to investors has not hurt them so far. However, average investors need to know that the bull market has ended.

The big blunder

As stock market volatility has risen, many average investors who want safety are moving out of stocks into bonds. They are doing so because they do not understand the following:

They can lose money in bonds.
Interest rates are rising.
Bonds move inverse to interest rates. In plain English, when interest rates go higher, bonds go lower.
Stocks are experiencing volatility because of rising interest rates.

What to do now

First and foremost, do not buy bond funds or ETFs.

Second, it helps to understand that most funds and popular ETFs are concentrated in a handful of stocks that have run up and now pose a high risk.

Third, if you don’t know what you’re doing always consult with a professional.

Fourth, check out Episode 60 of The #AskTheAdvisor Show by clicking here.

What is a stock market correction? And a few other facts you need to know

It’s been a crazy few days on Wall Street.

On Tuesday, the Dow plunged 567 points at the opening bell and briefly sank into correction territory before roaring back. On Monday, the Dow took its biggest single day point plunge in history.

Here’s what you need to know about what’s going on in the stock market.

What is a stock market correction?

A correction is a 10% decline in stocks from a recent high. In this case, that was less than two weeks ago, when the Dow closed at a record high of 26,616. A correction is less severe than a bear market, when stocks decline 20% from their recent highs. The stock market’s last correction began in the summer of 2015 and ended in February 2016.

Why is this happening?

The most immediate reason is a fear of inflation.

Last Friday’s jobs report was strong. Wages are rising, and unemployment is historically low. That’s great news for Main Street. But on Wall Street, it raises fears that inflation will finally pick up, and that the Federal Reserve will have to raise interest rates faster to fight it.

How are global markets reacting?

Overnight, world markets followed the United States’ lead and dropped. The Nikkei in Japan closed down 4.7%, China’s main stock index closed down 3.3%, and Australia’s closed down 3.2%. European markets were lower, but not as much as Asia. Stocks were down about 2% in Britain, Germany and France.

What does this mean for the rally?

From Election Day to the record high on January 26, the Dow climbed more than 8,000 points — a remarkable 45%. Many factors were behind the rapid rise: The ever-improving economy and job market, business optimism, record corporate profits, and the big business tax cut, which Republicans made law. The losses in the market since the beginning of last week wiped out about a quarter of that gain. The Dow began Tuesday up about 6,000 points since the election.

Is this the worst decline ever?

No.

Monday’s decline of 1,175 points on the Dow was, by far, the biggest point decline in history. The Dow had never lost more than 777 points in a single day. But in percentage terms, the declines of Friday and Monday are nowhere near the worst. On Black Monday in 1987, the Dow dropped an incredible 22%. That’s the equivalent of a 5,300-point decline today. And on several days during the financial crisis in 2008, the Dow dropped 6% or 7%. Monday’s decline was 4.6%. That was the worst for the Dow since August 2011.

Does all of this mean we’re entering a recession?

Stock market declines don’t cause recessions, and they do a pretty poor job of predicting whether one is coming. So while the market plunge might rattle investors and ding consumer confidence, it is not a sign that the economy is in trouble. Unemployment is at a 17-year low. Average hourly wages went up last month the most in eight years. Consumer and business confidence are near record levels. Economists say it would take a much bigger stock market move than Monday’s plunge to change that.

For more information visit us at Heritage Financial Advisory Group and check out the latest episode of The #AskTheAdvisor Show.

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Tag: bonds