Today is another "up" day in U.S. equity markets, but with each passing week we receive more warnings about the bull being long in the tooth. Already the great long rally in bonds appears rapidly to be giving way.
So as an individual investor, am I prepared? It's a good question, especially because some of the same sages who express worries about overpriced assets also caution against trying to time the market with wholesale exits and entries. Maybe muddling through, which is basically my approach, isn't such a bad approach.
This was a loser idea in 2008, of course. In the many months leading up to the financial crisis, I had pretty much stopped buying stocks and stock funds, but I didn't sell much, either. There's always the reluctance to realize taxable gains (then, as now), on top of the "timing" hesitation. In addition, many of us had the false sense that active mutual-fund managers with reputations for prudence would act to shield our holdings from the worst of a market reversal. Of course, that proved dreadfully wrong--most of those active managers just tracked the indexes (or misconstrued as "value" stocks too many companies with balance-sheet risk) and we got the same one-third wipeout that the passive investor suffered. The mutual-fund industry is still paying a price for that failure, with infusions of post-2008 money going mostly to low-cost index and ETF products. I, too, largely bought dividend-bearing indexes in rebuilding my portfolio through 2013 and tapered off after that.
So, as the Federal Reserve begins to extricate itself from the massive monetary easing of the last seven years, is there systemic risk on top of the usual bull-bear cycle? Another miscalculation that I, and probably others, made in 2008 was to think that Wall Street with its various derivative innovations would protect itself, at least, from a market turndown. This in turn would limit the overall economy's downside. That it failed to do so dragged down the whole economic house. Am I right now to think that greater buffers are in place as interest rates finally go up?
In essence, I am where I was in 2008, with somewhat more diversification into alternative asset classes, and considerably more of a relative cash position. I have an age-appropriate chunk in bonds but have tried to keep the durations short and thus supposedly less hostage to higher yields. I don't really trust the fund managers or the securities industry to be a windbreaker. But, based on recent reported returns, it doesn't seem that the "smart money' in hedge funds is all that better protected. Private-equity would be appealing, if often highly leveraged, but that's for the big boys. The rest of us may have to weather whatever storms are coming in that familiar muddle, hoping this time to have chosen the least worst course.
