If you’re a 401(k) investor, check your ‘risk aversion’—now

  
Via:  XXJefferson51  •  2 weeks ago  •  10 comments

By:   Brett Arends

If you’re a 401(k) investor, check your ‘risk aversion’—now
The point is not that the market is certain to crash or even likely to crash, but that it may, and it’s better to work out beforehand how that would make you react than to wait. I’ve covered so many market euphorias at this point that they seem as predictable as Hollywood movies: When you get to my age you know the plot, including the “surprise twist,” within the first 10 minutes. This euphoria will end badly. They always do. And Wall Street will probably be the last to tell you.

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We the People

The markets are at an interesting point now?  There are lots of questions as to what direction it will go.  What’s driving it? How will policies affect it?  It’s doing well with largely existing Trump trade, tax, and regulation rules.  Would it continue to do well if all the rules are messed with?  Low interest rated forced many to be in the market to get returns on investment capital.  How will bigger deficits, tax increases on investment capital, inflation, and rising interest rates affect people’s risk aversion and balance between stocks, bonds, cash?  Will the trend from actively managed funds to passive indexes continue? What about things that used to be outside of the market but now are in it due to exchange traded funds such as all the precious metals as well as commodities in general or in classes or single communities from oil to gold to lumber to corn? Will those spread the risk?  


S E E D E D   C O N T E N T



Opinion: If you’re a 401(k) investor, check your ‘risk aversion’—now



The moment when the Dow Jones Industrial Average DJIA tanks nearly 1,000 points (at one point) in a day is a good moment for anyone with a retirement account to double check what financial advisers euphemistically refer to as “risk aversion” or “loss aversion.”

I remember when I was young and signed up for a brief (and unprofitable) spell as a client of a major Wall Street bank, and I filled out one of those silly forms. How “aggressive” did I want to be? How “conservative”? These are meaningless terms. “How much money do you want to lose?” is a better question. “What would you do if you opened your next 401(k) statement and you’d lost half your money?”

I’m still waiting for someone to present me with an accurate way of measuring how much money I want to lose in advance. As Harvard’s Daniel Gilbert pointed out , we humans are really, really bad at anticipating how we’ll feel in some hypothetical future state.

Which brings us to the present moment.

Like everyone else, I actually have no idea what is going to happen next, and unlike many of them I’m not going to pretend otherwise. But this is the perfect moment to remember there is a perfectly plausible scenario where stocks actually halve from here.

Yes, indeed—as they did in 2000 to 2003 and in 2007 to 2009, and as they probably will again at some point in the future.

At the risk of hammering the same old story, stock market valuations by most long-term measures are higher than at any time in history. Not just higher than 1929 or the late 1960s, but a lot higher. One reads money manager John Hussman’s permanently gloomy market commentaries at one’s peril, but they are a useful antidote to excess euphoria. One of his latest, scary valuation charts is presented on what’s known as a “log” or logarithmic scale, a mathematical tool for reducing visual extremes, and it still looks insane. “Unless you’re neutral or short, you don’t want to see what this chart looks like  not  on log scale,” he writes.

The point is not that the market is certain to crash or even likely to crash, but that it may, and it’s better to work out beforehand how that would make you react than to wait. I’ve covered so many market euphorias at this point that they seem as predictable as Hollywood movies: When you get to my age you know the plot, including the “surprise twist,” within the first 10 minutes. This euphoria will end badly. They always do.

And Wall Street will probably be the last to tell you.

Indeed for the last couple of weeks they’ve been trying to pretend that the economy is now running so hot that the big risk is inflation.

Meanwhile, all the actual economic indicators worth watching have been pointing in the other direction.

For instance, check out the chart above. It measures the Russell 2000 RUT small cap index against the S&P 500 SPX large cap index. Very simplistically, small-company stocks tend to be riskier, more boom-and-bust, and more tied to the domestic economy. So when they are doing badly compared to (supposedly) safer big company stocks, it is often an indicator that things may be slowing down.

Or take a look at lumber prices, tied to the domestic economy and the new real estate mania. Lumber prices have fallen by two-thirds since early May. Yes, really.

During the same time both the Atlanta and New York Federal Reserves have slashed their running “nowcast” estimates of economic growth by about a half. The economy in the second quarter is still expected to have to grown strongly, but by far less than was expected two months ago.

And this was happening well before the latest sudden alarm. “If recent market performance is anything to go by, investor confidence in the recovery is evaporating,” warned SG Securities’ strategist Andrew Lapthorne in a research note…a week ago. He added: “(A) variety of “reflation” plays have all headed south in recent weeks.”

The latest move might be a tempest in a teacup, the regular “summer swoon” on the stock market, or it might be something worse. We’ll find it soon enough. But for anyone taking on too much risk in their 401(k) and their IRA, this might be a timely reminder that things go down as well as up.

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About the Author








Brett Arends is an award-winning financial writer with many years experience writing about markets, economics and personal finance. He has received an individual award from the Society of American Business Editors and Writers for his financial writing, and was part of the Boston Herald team that won two others. He has worked as an analyst at McKinsey & Co., and is a Chartered Financial Consultant. His latest book, "Storm Proof Your Money", was published by John Wiley & Co.







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XXJefferson51
Senior Guide
1  seeder  XXJefferson51    2 weeks ago

This seed is about money and the markets. Personal micro economics and national macro economic issues related to the markets and finance are on topic.  References to political leaders such as Biden and Trump are on topic only insofar as they relate directly to fiscal and finance issues only.  

 
 
 
XXJefferson51
Senior Guide
1.1  seeder  XXJefferson51  replied to  XXJefferson51 @1    2 weeks ago
I remember when I was young and signed up for a brief (and unprofitable) spell as a client of a major Wall Street bank, and I filled out one of those silly forms. How “aggressive” did I want to be? How “conservative”? These are meaningless terms. “How much money do you want to lose?” is a better question. “What would you do if you opened your next 401(k) statement and you’d lost half your money?”

I’m still waiting for someone to present me with an accurate way of measuring how much money I want to lose in advance. As Harvard’s Daniel Gilbert pointed out , we humans are really, really bad at anticipating how we’ll feel in some hypothetical future state.

Which brings us to the present moment.

Like everyone else, I actually have no idea what is going to happen next, and unlike many of them I’m not going to pretend otherwise. But this is the perfect moment to remember there is a perfectly plausible scenario where stocks actually halve from here.

Yes, indeed—as they did in 2000 to 2003 and in 2007 to 2009, and as they probably will again at some point in the future.

At the risk of hammering the same old story, stock market valuations by most long-term measures are higher than at any time in history. Not just higher than 1929 or the late 1960s, but a lot higher.

 
 
 
XXJefferson51
Senior Guide
1.1.1  seeder  XXJefferson51  replied to  XXJefferson51 @1.1    2 weeks ago

A discussion about risk levels, whether you like aggressive, some degree of moderate or conservative portfolios of investments.  Also the mix between large, mid, and small caps, proportions of value and growth in each and the balance between domestic and foreign investment. The ratio of stocks bonds and cash in all the above is important based on age and risk toleration.  Also of interest is your preference for individual stocks or exchange traded funds or mutual funds or some combination of them?  

 
 
 
devangelical
PhD Principal
2  devangelical    2 weeks ago

[removed]

 
 
 
Gsquared
Sophomore Principal
2.1  Gsquared  replied to  devangelical @2    2 weeks ago

[removed]

 
 
 
JBB
Professor Principal
2.2  JBB  replied to  devangelical @2    2 weeks ago

[removed]

 
 
 
XXJefferson51
Senior Guide
2.2.1  seeder  XXJefferson51  replied to  JBB @2.2    2 weeks ago

An interesting on topic read:

 
 
 
evilgenius
Professor Participates
3  evilgenius    2 weeks ago
Lumber prices have fallen by two-thirds since early May.

After climbing to record increases over the last year. It was just a few weeks ago the Trumpublicans were bitching about the high price of lumber was an indicator of inflation.

 
 
 
XXJefferson51
Senior Guide
3.1  seeder  XXJefferson51  replied to  evilgenius @3    2 weeks ago

There are multiple indicators that lean toward a suggestion of current and maybe future inflation.  There is also a chance that if the market drops a lot that it could trigger deflation instead. The market collapses, the feds cut rates or keep them where they are if at present rates in hope of stimulating consumption while producers cut prices in search of the same leading to a downward spiral making existing debt harder to bear.  Deflation for those in debt is far worse than inflation.  Right now we have as a result of Trump regulations and taxes and trade policies combined with existing but not future stimulus is in x classical Goldilocks mode or just right.  The issue as raised by the financial markets article and by me is what’s next?  

 
 
 
XXJefferson51
Senior Guide
3.2  seeder  XXJefferson51  replied to  evilgenius @3    2 weeks ago

Think this is a ‘weird market’ right now? Here’s more proof

THE TELL

To market veterans, talk of a stock-market “bottom” after a mere 3% pullback might sound odd, but that’s the sort of world investors live in right now, says one chart watcher.

Video: Commodities are on fire this year — What this ETF analyst sees ahead (CNBC)

Commodities are on fire this year — What this ETF analyst sees ahead

While stocks have climbed in 2021, hitting new highs as recently as last week, fewer and fewer individual stocks have participated in the move, said technical analyst Andrew Adams in a Wednesday note for Saut Strategy. That narrowing breadth is what’s now sending a bottoming signal, though indexes haven’t suffered steep falls.

Stocks got smacked hard on Monday, accelerating a selloff that began late last week and left the S&P 500 down 2.9% from its July 12 record close. The Dow Jones Industrial Average on Monday suffered its biggest one-day drop since October. The S&P 500, Dow and Nasdaq Composite subsequently bounced back Tuesday and Wednesday, taking back all the lost ground.

In One Chart: Why the S&P 500 could be poised for a 5% drop — or even more this summer

While the moves on Monday were dramatic, the scope of the selloff wasn’t what would normally prompt talk of a washout, given that steeper pullbacks of at least 5% are relatively common.

But a look beneath the hood shows that market breadth has been narrowing since February, Adams said.

Several individual stocks have fallen 10%, 20%, or much more from their previous recovery highs, he said. As a result, it hasn’t taken much damage to the S&P 500 or Nasdaq averages to get to the point, in terms of breadth, that have signaled past market bottoms.

“It feels strange talking about a ‘bottom’ after only a 3% dip in the S&P 500, but, again, this is a weird market right now,” he said.

Adams explained that in a “legitimate” market pullback, fewer than 30% of stocks on the New York Stock Exchange and Nasdaq exchanges remain above their 50-day moving averages. Readings below that threshold represent a “washed out” market, that’s likely getting close to being oversold and attractive to traders eager to buy the dip, he said…

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