The next five years will be great for traders and stock pickers, not for index investors.
In the early stages of a bull market, most stocks go up. In other words, making money isn’t a tough task. Holding and buying on dips is a healthy strategy, which works well. You don’t need to pick particular winners, just stay LONG the broad indices, such as the S&P 500, the Dow Jones, NASDAQ, or Russell 2000 and you’ll do very well.
However, as the bull market matures, valuations, in general, become quite high. Investors bid up prices to the point that businesses are unable to grow fast enough to justify its share prices. This doesn’t mean that a bear market immediately pursues. Stock markets have stayed expensive and even insanely expensive, before finally peaking, but buying and holding doesn’t work anymore in these periods.
Buying the NASDAQ index in 1998 would have been a great decision, if you went into it, knowing that holding was incredibly risky and hitting SELL at the first sign of trouble is critical for success, as you knew that your trade only works, as long as the bull market is at play. You weren’t buying cheap in 1998. Instead, you were tagging along for the final stages of the bull market.
Put differently, we’re entering a part of the cycle, which requires more expertise and better judgment from you. The easy gains, the Cheap to not Cheap Trade is, by and large, over.
To prosper in the years ahead, when the S&P 500 is projected to achieve total returns, which are, pretty much, on equal grounds with inflation, you need to become a trader and a stock picker.
In essence, I want you to understand that the bull market is set to continue, but taking profits will become more frequent as part of our strategy, as we are approaching the end.
An analogy of this situation would be to imagine a tiny rock island, the size of a room, which you are standing on, with a boat right next to it. The rock island is within paddling distance of safe shores, but those beaches offer no riches (this is the safety people place on precious metals). On this rock, you are exposed to the elements, but it is full of foods and drinks, which are about to expire and become rotten, so you want to gorge yourself as much as possible because you don’t know when you’ll find another rock and have another opportunity to eat and drink like this. The rock island is a bull market.
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The boat next to the island represents fiat currency cash, which is vital to have in order navigate between rocks, but it is less advantageous than being on shore, of course. In the same way as gold is better than USD, so does being on shore better than staying on a tiny, fragile boat.
Now, imagine that you’re starting to feel the rock is collapsing into the ocean floor, but still want to keep eating and drinking, so you take on more risk, to be ready for your time on the boat and the shore.
The 9.5 year bull market is close to wrapping up, but as predicting when the ocean will swallow the rock island is impossible, you know that moving foods and drinks to your boat and making sure your boat is intact, are critical acts to follow.
You also see that close by there are no other islands and that, at some point, this old boat will fail you (just as all fiat currencies go back to their intrinsic value), so you speculate that everyone will be going ashore soon and that selling them beachfront land will be valuable. The mass migration back to shore is expected, but not happening yet, then.
This is likened to how precious metals truly shine most when there is no bull market (no foods and drinks to gorge on an island).
There are many people in the water as well. They don’t own a boat, nor can they swim too well. In our analogy, this is the lower-income people, who don’t have any savings. Are we about to let them all drown, when we can throw them lifelines from the big vessel, traversing through the waters (the Federal Government)? The problem is, though, that the people on the big vessel told the swimmers that it is safe to stay in the water because help is coming, but the big vessel can’t attend to them all, in reality.
This is similar to the unfunded liabilities. The people in the water start to come to terms with their fate, and they set their sights on the vessel, the boats, and your food. This is parallel to the tale of the U.S. economy and its growing wealth gap. Division, internal strife and suspicion are created between the HAVES and the HAVE NOTS.
Though this tightening cycle, by the Federal Reserve, has taken us to only 1.75%-2.00%, it could be peaking soon.
Since 1954, the Federal Reserve has conducted 13 tightening cycles, all ending with a recession. It is simply impossible to get them right.
The longest one took five years, which, if repeated, would last until the next elections, in December 2020. If this one follows the averages, it will end in the summer of 2019.
People who stay ashore when rock islands are filled with foods and drinks, just because rocks do end up on the bottom of oceans, will never be full (The gold bugs can never become wealthy). Those, who think the vessel will screw them at some point, are right (The government will have no choice, but to cut social programs). The only ones, who make it in this world, are those, who understand each of the tools at their disposal: rock islands (bull markets), storms (bear markets), vessels (government), boats (cash), and shores (precious metals), make it HAPPEN!
Research Partner, PortfolioWealthGlobal.com
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This work is based on SEC filings, current events, interviews, corporate press releases and what we’ve learned as financial journalists. It may contain errors and you shouldn’t make any investment decision based solely on what you read here. It’s your money and your responsibility. The information herein is not intended to be personal legal or investment advice and may not be appropriate or applicable for all readers. If personal advice is needed, the services of a qualified legal, investment or tax professional should be sought.