Protect your money: 2016 investment markets analysis

Apr 5, 2016

By Dr. Harold Wong
Sound Money

The first two weeks opening in the U.S. stock market was considered the worst opening two weeks ever.

This negative performance also occurred in other stock markets in Europe and Asia. On Jan. 12, 2016, the Royal Bank of Scotland said, “Sell everything except high-grade bonds.” Now that we have passed Feb. 15, 2016, many stock markets around the world have dropped 10 percent to 20 percent in value. 

Many individual stocks, including Apple, have dropped 30 percent to 40 percent from their previous 52-week highs. After almost a 6.5-year bull market in U.S. stocks (with the low in the Dow-Jones Index  March 9, 2009), the stock market started wobbling August 2015 over concerns about China’s slower economic growth. On Aug. 24, 2015, the Dow-Jones Index opening dropped by 1,089 points (the largest ever in history) and ended the day down 588 points, the worst decline since August 2011. After a brief recovery at the end of 2015, many investors have changed their sentiment and are no longer optimistic about stock market returns for 2016.

Robert Shiller, a professor of economics at Yale, won the Nobel Prize in Economics in 2013. He developed the CAPE Index, where price earnings ratios are adjusted earnings over a 10-year period. Corrupt top management of a company can manipulate or fraudulently report profits for a short-term period, perhaps even a few years, to get unwarranted huge annual bonuses. However, even a company like Enron can’t fool investors for 10 years before accounting fraud is discovered.

The CAPE Index was 27 on Aug. 30, 2015, versus the average ratio of 17 from 1881-2015. This ratio of 27 had only been exceeded three previous times: 1929 (before the October stock market crash that triggered to Great Depression); 2000 (the peak of the dot-com boom); and 2007 (just before the 2008 stock market crash). Shiller predicted the 2008 crash. Although Shiller never claims to have an exact crystal ball, when the CAPE index gets too high, it has historically been followed by a substantial downturn or crash in stock market prices.

Another major concern by financial and economic experts is that the U.S. (and the rest of the world) has very slow economic growth and collapsing commodity prices. Let’s suppose that we enter a period of either actual deflation (prices drop) or no inflation (prices don’t go up). What would make sense for investors?

First, lock in as much guaranteed retirement income that you can. Almost everyone takes Social Security at 62. For older baby boomers, full retirement age is 66. If their Social Security benefit was $2,000 a month at 66, it would only be $1,500 a month at 62 and would be $2,640 a month at 70. Only 5 percent of men wait until age 66 to take Social Security and only 1.2 percent wait until age 70, where they would get 76 percent more than if they took it at age 62 (See my series on SS strategies, found at www.DrWongInvestorGuide.com). Second, work 5-10 years longer to create more retirement savings. This will also allow some pensions to increase your benefits. 

Third, look at the private pension concept. In July 2014, a nurse (age 62) deposited $250,000 in a private pension fund. She will wait until age 70 to trigger the income and will be guaranteed $25,000 every year for the rest of her life. By combining all three concepts, she will retire at age 70 with a higher total net retirement income than the income she had while working. She will be able to enjoy her retirement years and not have to constantly worry about money.

If we are in a period of slow economic growth, stagnant wages, declining commodity prices, and the end of the stock market boom, preservation of capital and guaranteed income should be more important than taking major risks with your life savings. © Harold Wong 2016

Harold Wong can be reached at 480-706-0177 or at haroldwong1@yahoo.com. For his archived research, click on www.DrWongInvestorGuide.com.