Index investors have much to be pleased with, particularly those who bought American.
The S&P 500 has rocketed to all-time highs in recent weeks with NAFTA negotiations trending positive and solid corporate earnings. At the same time, journalists, investors, and regular people alike are all talking about how the bull market is on its last legs.
“Be careful. You should sell. I don’t think there’s much room left to grow,” said a colleague to me as we chatted personal finance. We were talking pensions casually when the conversation shifted to ETFs and index funds (he is all in on real estate, by the way…).
As he walked away, I smirked, but I had a second guess moment: what if he was right?
Usually recessions begin when…
1929. 2000. 2008. Prior to all of these pullbacks, people were getting stinking rich. It seemed that the prospect of losing money was rare. Economies were booming. Stock markets rocketed to their own all-time highs, and then it all came crashing down and everyone (largely) never saw it coming.
The circumstances sure feel similar now. And a recession is inevitable… right?
But let’s take a step back… and rebalance.
One of the first fundamentals of investing is rebalancing. Unfortunately, I know far too many people who say “100% equities!” all the way. While that may be in their risk appetite, the truth is there’s not much left to rebalance with. Leaving fixed income assets, such as bonds and GICs, off on the sidelines means when things turn for the worse, the pain will be immense.
Some of them may argue that fixed income is right now asking for sub-optimal returns. After all interest rates are still low and bonds keep getting pummelled. Why buy an asset now that can’t seem to stop the bleeding?
However, my view is that with true diversification, there will always be a little bit of pain.
Forgive the sad, possibly pessimistic analogy, but think about your portfolio like your body. It’s made up of moving parts, but it’s never perfect. Your neck might ache one day. Or your back. And some days or worse than others, but with a proper plan, you persevere. It’s virtually impossible to live a day without the minor discomforts, but when the rest of you is working probably, you barely notice the pain.
The pain: that’s the product of diversification. A perfectly diversified portfolio usually is never fully free of it.
So to answer my original question: should I sell my S&P 500? Sure, but only some if I want to rebalance my portfolio into fixed income. I can take the pain. Are you going out and getting yours?