After a year – really a decade – of excellent returns in the stock market, and for 2019 in the stock AND bond markets, it makes sense to ask, “WHAT IF?” As in, what if certain events take place in the markets or economy that could spoil the last several years of positive portfolio returns? Naturally then, there would be a handful of guesses or responses to the “what if” questions.
Here are a few “What if” questions:
- What if the US Federal Reserve starts talking about raising interest rates? (Unlikely any time in at least the first half of 2020 but only time will tell.)
- What if uncertainty in US trade policy negatively affects equity markets? What if China will not agree to some kind of compromise with the US (and vice versa)?
- What if economic growth slows?
- What if the currently strong US employment picture begins to show signs of weakening?
- What if consumer spending slows down? (This could be a biggie.)
- What if real estate markets weaken? (In the current low interest rate environment this is rather unlikely to happen quickly.)
- What if Brexit does not go through?
- What if [fill in the blank] gets elected US President in November 2020?
- What will happen when – not if, but when – tax rates go up? (Taxes in the US are likely to be going nowhere but UP following the expiration of the 2017 tax law.)
- What if inflation picks up?
- What if Social Security comes under pressure?
Here is a stab at an overall response:
Most if not ALL of these questions have existed for the past decade or at least the past five years. In the case of the US Presidential election there has been economic uncertainty around that event for multiple decades.
In terms of investing to preserve value and grow a portfolio, the “lever” over which an investor has discretion is Asset Allocation (relative percentages of stocks, bonds, cash and other assets like real estate). The higher the amount of cash in a portfolio, the higher the current preservation of the portfolio (however, over the longer-term inflation lessens purchasing power of today’s cash).
Asset Allocation is not a 100% cure-all for market losses, but asset allocation can serve to reduce volatility in a portfolio. Asset allocation can be controlled and monitored. In fact, current asset allocation should ALREADY be taking into account ALL of the above – and then some. Please ask me about this.
The most important “what if’s” are the personal what if’s in YOUR LIFE. Those are the primary what if’s that I am discussing today with my clients and friends.
Thank you for reading, TGIF and Happy New Decade!