Copyright syracuse.com
“One of the troubles with Wall Street is that people feel it’s either ‘impossible’ or they figure it’s ‘easy.’ — John Magee, author — Wall Street, Main Street, And You (1972) Just six months ago, when markets were very volatile because of tariffs and economic uncertainty, our Investors’ Edge column featured a question-and-answer format. One of our readers asked for investment ideas to protect from future tariff and inflation uncertainty. In my answer, I recommended the I-Shares Gold ETF (IAU) and the Vanguard International Dividend ETF (VYMI). Since my column, these investments are up 35.31% and 13.93% respectively. I also strongly encouraged readers to stay invested in stocks and not allow intense short-term market convulsions to impact your long-term investment plan. I hope you took heed — the S&P 500 Index is up 20% since then, rising for six straight months. The point is, I know that a big part of my job — not only as a money manager but author of this column — is to keep our readers invested through inevitable scary stretches in the stock market and remain focused on their long-term goals. So today, with markets at all-time highs, and just two months left in the year, I want to address some of the questions I have recently received to help prepare your portfolio for what’s ahead. I keep hearing that the stock market is in a “bubble.” Even Federal Reserve Chairman Jerome Powell says equities are overvalued. What do you say? Based on historical valuation metrics, the stock market is overvalued. On price-to-earnings, price-to-book, the Schiller Index, the “Buffett Rule,” etc., stock valuations are high. Furthermore, the returns over the past three years have been remarkably smooth. I am reminded of the iconic Grateful Dead song, “Uncle John’s Band,” when Jerry Garcia sings, “When life seems like easy street, there’s danger at your door.” Ultimately, the high valuation of stocks must be justified by continued AI spending that translates to higher productivity and higher corporate profits. On this point, I’m optimistic. Last month, Bank of America released a report stating that they expect investments in artificial intelligence to nearly triple over the next five years to $1.2 trillion annually, “constrained only by the ability to scale buildings and power.” Others believe we are in a much later stage of the AI buildout. Regardless, readers must be prepared when inevitable corrections and bear markets arise. It goes without saying that sooner or later, we’re going to have another recession, sharp correction, or a bear market, and the financial media will then turn from reporting “boom” to “gloom.” Here is a worthwhile exercise: when you get your monthly brokerage statement, discount its current value by 15 to 20% — or more. That will give you a margin of safety, in your own mind, as to what your portfolio value is worth, and help you be psychologically prepared, in advance, for a sharp market drop. I’m not suggesting that is what’s about to happen, but it is helpful. I’m retired and dependent on my investments to support my living expenses. How much of my investments should I have “off the table” in case the market drops 15 to 20% — or more? Generally speaking, I recommend that individuals in this position have about two to three years of projected spending needs set aside in cash/fixed income to provide buffer protection from market volatility. This way, as liquidity events arise (intermittent withdrawals, required minimum distributions, gifts to children, etc.), you don’t have to sell stock positions in a down market. For many clients and readers that I talk with, they are in a fortunate position where their liquidity needs from their investments are modest, and much of their portfolio will eventually pass to the next generation. I encourage them to maintain as long-term, equity-oriented asset allocation as reasonably possible so their assets can continue to grow for their heirs. While markets are no doubt volatile in the short run, the long-term benefit of maintaining a growth-oriented portfolio is indisputable. At the end of the day, it’s about you and your specific circumstances. Remember, sticking with your investment plan, especially during volatile markets, is paramount. What’s your take on the government shutdown and its impact on the markets? It seems like neither side in Washington has the polished negotiation skills needed to benefit the American people. So far, however, the market has taken the shutdown in stride, and its negative economic impacts have been relatively limited. Time will tell, but I would make no portfolio changes based on politics — ever. Any year-end financial planning suggestions? Here are four good ones: Evaluate your portfolio’s holdings and asset allocation and rebalance where appropriate. Look for tax-loss harvesting opportunities in your non-retirement brokerage accounts. Complete your required minimum distributions, charitable gifts, stock donations, and qualified charitable donations (QCDs). Set financial goals for 2026, including how much you would like to save, donate, gift to children, etc. Get it done! These are pleasant days for stock market investors — but it won’t always be this way. So enjoy it. Happy Thanksgiving.
