Is now a bad time to invest?
Written by: Benjamin Bimson CIMA® / BCJ Financial Group
I get this question a lot. Markets are near 20,000 on the Dow, record S&P 500 and Nasdaq index levels. To be perfectly frank with you, it depends.
One question that you should ask yourself is what you are investing for. Are you investing for short term growth? I’d say, that can be a dangerous game. Are you investing for income? There are some attractive segments of the market. Are you investing for longer term growth? This makes sense if you are prepared for all potential outcomes.
I will attempt to help walk through these three questions. Remember that there is no way that anybody can guarantee exact outcomes. Every one of these decisions is derived from your specific needs, desires and ability to stomach all the unexpected outcomes possible.
Should I invest for short term growth? This is a temptation that seizes upon each one of us at various times. We look at what we could have made with our cash over the last two months and say, “hot dog! That would have been great!” We call that a regret of missing out.
Be careful of that regret. One of our own advisors likes to ask the question, “would you feel worse if a) you are in the market when you should have been out or b) you are out of the market when you should have been in?” It is a good question that warrants serious consideration. I cannot and nor can any of the all-to-sure of themselves pundits on TV, tell you what will happen in the next x-days or x-months. I wish I could, it would be so much fun.
Is now ok if I am investing for income? Where are there opportunities? Like many things, we want to examine what options are out there. Talking with your advisor will assure that it is ideally built. There are ample options for those seeking guaranteed income. If you are in effective tax brackets over 25% federal, now could be a good time to consider individual municipal bonds or specified maturity date ETFs. Why? They got beat up badly. Very badly.
It will help to look at a couple charts. The first chart shows how badly beat up municipal bonds were post-election in November 2016.
The biggest reason they sold off badly is rhetoric about potential top tax level tax cuts from 39.6% to 33% by the Trump camp. Secondly, with all of the pro-growth policy potentials, it is likely that there will be new debt issuance in a rising interest rate environment. This creates an atmosphere of potentially rising supply and decreasing demand. Sounds like a bad reason to invest, but most of the time market overreaction happens.
This next chart shows outflows from municipal bond mutual funds and ETFs. Notice that it was the biggest ever at the end of 2016.
Lastly, for income-oriented investors, municipal bonds are increasingly more attractive for high tax bracket investors. Here is a chart that shows the deviation on a maturity duration basis. The x-axis shows duration from 3 months to 30 years. On the very short and very long ends, municipal bonds are significantly more attractive. Here is what that looks like.
What about the longer-term growth oriented investor? There are opportunities and risks aplenty. That might not sound very good at first. However, that means there could be reasons to have the market go up, but enough risk keeps some investors sidelined.
Why is that a creation of a reasonable environment to invest? Normally the top of a market comes when there is virtually nobody saying that the world is about to end. Similarly, the bottom of a market often is close when virtually nobody has any hope left. When it is a mixed bag and seemingly confusing, there is potential for the current trend to continue. The current trend is a market expansion. Here is the last 10 years for the SP500 and NASDAQ.
There are opportunities, but keep in mind that risk is also real. It matters about strategy this long into an expansion cycle. It is advised to have clear and definitive strategy for dealing with opportunity and risk in this environment.
Is now a good time for you to invest? We have the tools to walk you through the decision-making process. There are probably going to be some surprises this year. Some are likely to be good and some not so much, and navigating through that environment is where professional help is the most valuable.
Our tactical strategies are built for this environment. They are unique strategy tools, specifically tailored to be sensitive enough to take advantage of trends and stop pain potential with massive crisis. They are not market timing strategies, but rather risk management strategies for today. These are currently not overly optimistic nor predicting doom and gloom. However, it does seem logical to predict that the upward trend can go higher, likely with some increased daily volatility.
Now is a good time to discuss your situation, have a plan, know yourself and seek out professional guidance.
1-Munis Muddied Outlook. Ned Davis Research Group. January 5, 2017. [1/7/16]
Securities offered through World Equity Group, Inc. Member FINRA/SIPC. Advisory Service offered through BCJ Capital Management. World Equity Group, Inc. and BCJ Capital Management are independently owned and operated. Investment advisory services are offered through BCJ Capital Management, an SEC registered investment adviser. BCJ Capital Management is a (SEC) registered investment adviser. Information presented is for educational purposes only. It should not be considered specific investment advice, does not take into consideration your specific situation, and does not intend to make an offer or solicitation for the sale or purchase of any securities or investment strategies. Investments involve risk and are not guaranteed. Be sure to consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. BCJ FG 17-397