From The Daniel Island News
Bull or Bust? Boat or Socks?
By Stephanie W Mackara, JD
Apr 17, 2013 - 9:49:57 AM
This time of year is often the one time of year many of us focus on our portfolios, investments and bank account balances. We have anxiously waited for our trusted accountants to give us the thumbs up or thumbs down...Can we buy that beautiful new boat we have been longing for? Or is a pair of socks more within our reach once the government takes its share? Now that April 15 is in the rearview mirror, you may find yourself feeling pretty good about your investment portfolios this year. The tumultuous markets we have seen over the past five years left us doubtful there were any bulls left. However the markets have consistently produced enough positive returns over the past several months that many of us have gains in our portfolios we haven't seen in years causing a nice lift to both our portfolios and our spirits. A sigh of relief may take hold giving you renewed confidence in the market and even perhaps our government, but before you decide to purchase that center console fishing boat, here are a few things to consider:
Why are the equity markets in favor?
It is tempting to attribute the strength of the equity markets to optimism about the American economy, but that may be inaccurate. Equity markets are on the rise, though fundamentals point to the contrary: weak GDP, slowing of corporate profit growth, and continued geopolitical strife. Money is pouring into equities because there are simply very few alternatives. Interest earned on cash is actually negative (after inflation) and government bonds are only slightly better. Interest rates are low because domestic and international governments are making asset purchases, artificially causing yields to remain low resulting in a rotation out of bonds into equities.
Additionally, as I have discussed in prior articles, our nation has avoided a cliff and a sequester in the past 3 months, (you can't make this stuff up!) leaving some believing that we weathered the storm and have come out unscathed. In fact we have only delayed dealing with the issues for another six months instead of addressing the fundamental issues that cause our nation’s economic woes - it's like spraying perfume on a pile of manure, eventually the stink will emerge.
With market growth not solely attributed to genuine growth, but partially the result of government assistance, what may happen when the assistance stops? This past week the Fed announced a plan to slow asset purchases. Will equities continue to rise? No one knows for sure.
It is a confusing environment; just this week we reached a record high on the S&P on Wednesday followed with a shaky opening on Thursday. In such an erratic time it is crucial to keep your eye on the prize, to stay on track with a plan that has the potential to help you to meet your goals. A properly diversified portfolio should have exposure to equities as well as other asset classes, keeping in mind the temptation to increase your equity exposure could come at a price. Increases in equity exposure should be done based on meeting your investment goals, not following the trend or chasing market highs. Chasing performance is a fool’s game; stay focused on your goals, avoid the "herd" mentality and seek professional guidance to make certain your portfolio is properly aligned with your personal goals.
Stephanie W Mackara is a Daniel Island resident and partner in an investment management firm. She can be reached at email@example.com or 610-613-6452.
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