How To Read Market Commentary and Stay The Course

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forecastcloudEvery day, new articles are published telling you to buy this! Sell that! Hedge against this other thing! One of the most underrated skills in investing is the ability to stick to your plan and do nothing.

Some folks argue that that solution is to never listen to any market commentary (or “noise”). Keep your head down, plow your money into index funds and don’t look up until you’re ready to retire. Well, if you can do that, more power to you. However, I’ve been getting more e-mails from people scared to invest due to reports of high stock market valuations and rising interest rates. Here’s an example of how I read market commentary and keep on truckin’ ahead.

The Blackrock Investment Institute recently released their Q4 2016 Global Investment Outlook, which has a lot of carefully-considered statistics, charts, and predictions. The chart below compares the current yields of various asset classes as compared to their pre-crisis averages (2003-2008):

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Blackrock’s analysis:

High valuations versus history point to more muted returns across asset classes in the long run. Yet slowing nominal GDP growth and aging populations argue for lower bond yields than in the past — and sustained demand for high-quality bonds. This structural shift changes the prism of assessing today’s valuations. It makes risk assets such as equities, credit, local EM bonds and selected alternatives look attractive on a relative basis.

I choose to take my risk and upside potential with stocks. While stocks have lower earnings yields (higher P/E) than pre-2008, they are still more attractive than high-quality bonds on a long-term basis. They are certainly more attractive than cash. US, European, Japan, Emerging Markets, nothing looks horrible.

I only invest in high-quality bonds because I want bonds to serve as portfolio ballast and help keep the ship steady. Risky bonds are more correlated with stocks, meaning if stocks go down then they are more likely to go down as well. I simply don’t want to own those types of bonds, even if they yield a bit more. Thus, I ignore any recommendation to buy high-yield corporate bonds, high-yield municipal bonds, and emerging markets bonds.

You can see that the high-quality bond yields are all significantly lower in the current environment. This second chart below looks more closely at the current bond picture. If you are in a high tax bracket, you should consider investment-grade municipal bond funds due to their high effective yields. Otherwise, a broad US Corporate bond fund (Investment Grade) is still a pretty good choice, and a a broad Total US Bond fund (US Aggregate) is in the “okay” zone.

bii2

If you’re doing the sensible index fund thing, perhaps via Vanguard Target Retirement fund, then I see nothing wrong with staying the course. Nobody knows what will happen in the next 1, 3, or 12 months. Stocks could drop. Rates could rise. But stocks could also keep going up. Rates could also stay flat for a decade. Investing for the long-term requires perseverance. Stocks are still compensating investors for taking risk and are more attractive than bonds in the long-term. I would still add some high-quality bonds to smooth out the ride.

Finally, keep on saving. As Jack Bogle says, “If we’re going to have lower returns, well, the worst thing you can do is reach for more yield. You just have to save more.”

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Comments

  1. I try to keep a healthy mix of stocks, bonds, and some junk bonds. Yes it is riskier, but I have a higher risk tolerance than your average person I guess. Higher risk = higher reward. There will definitely be more volatility, but that’s the nature of riskier assets.

  2. Thank you for the article Jonathan.

    I agree with you – staying the course is the only sensible thing to do. It is the toughest thing to do as an investor, because there is always conflicting information out there, whose goal is to make you “act on it”. Sitting and doing nothing is the thing that truly makes money, but it “feels” like you need to do something in order to earn those returns. If you have selected a strategy to follow, then you should follow the strategy, not some talking heads whose income depends on selling fear and uncertainty.

    As I am saying this, I see a lot of fellow investors who have been selling out of their stocks, waiting for a “crash”. I think these investors will learn a valuable lesson about the dangers of timing the markets, and investing based on gut feelings.

  3. which breakage do you have? I have Fidelity and see how all people talk about Vanguard. Is it better to close an account and move to Vanguard? What are you currently invested? if you don’t mind me asking

  4. also, if you’re kind of starting out, well i’d invested about 10 yrs ago and then paused, which investments would you pick? for myself and parents …actively / index funds, etf’s / mutual funds? and whose advice would you use morningstar’s investment newsletter or the vanguard newsletter by Dan Weiner?

    thanks

  5. are you, by any chance from Oregon, OSU shirt? I’m in Oregon.

  6. Do you notice differences between Fidelity and Vanguard? How come you split, why not just combine in one brokerage?

  7. Do you listen to bogleheads’ advice?

  8. Jonathan, for bondds would you recommend buying iBonds every year or something like BND?

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