Joseph P. Kennedy, first chairman of the SEC, once said he knew to dump his holdings when he got stock tips from the kid shining his shoes.
That wisdom worked for me in March of 2000. Minutes after hearing the baggers at my local Safeway banter about which tech stocks they were buying, I called my broker and cashed out.
While I missed the peak when the Nasdaq broke 5,000 a week later, I also missed the resulting downside; and I used my proceeds to bottom feed.
It’s a lesson advisors could offer to clients today. But should they?
While voices predicting the end of this cyclical bull market grow louder, fueled by equity prices backing off some post-crisis peaks, other pundits argue we’ve not yet reached the top.
Three activities tend to predict market peaks: excessive numbers of mergers and acquisitions, a feverish IPO pace and aggressive market participation by individual investors. We’ve seen M&A activity surge, with 2014 poised to see the most mergers in five years.
And we’ve seen another troubling sign—mergers between firms that display few obvious synergies. But mergers don’t happen without optimism, and much of what we’re seeing is likely a manifestation of pent-up demand being unleashed post-crisis.
Plus, with many large companies avoiding hiring, buyouts become a natural option for executives feeling pressured to show shareholders they have plans for all the cash they’ve been sitting on.
Timing also appears to be triggering at least part of the IPO boost. In the wake of tight hiring practices post-2008, many job seekers opted for entrepreneurship. Similar unemployment trends in the early ’90s led to formation of the web-based companies that spawned that era’s tech boom. Deal underwriters today, though, appear more cautious. And investors are asking hard questions about pricing and company fundamentals when new issues come to market.
And then there’s the retail investor. While yield chasing, especially among near-retirees, has funneled huge amounts of capital into equities, the zeal of past bubbles isn’t present. That’s because many older investors are choosing equities by default, since they can’t capture sufficient upside from fixed income instruments.
It’s a scary place to be for a large demographic that doesn’t have the wherewithal to withstand a second market correction, especially when falling oil prices put the strength of our petrodollar and Canadians’ buying power at risk. And, when surveyed, a large percentage of these investors say they’d prefer to be in lower-risk investments.
Still, near-retirees can’t simply shift to bonds, because rock-bottom interest rates spoil returns and create too much risk on the income side of their balance sheets.
So, while many signs suggest stock prices have room to run, it falls to advisors to build asset mixes that match risk profiles.
Many clients in the 60-plus bracket will be more comfortable with a sure thing, and playing defense will help clients split the difference if the upside starts to fade.
Originally published in Advisor's Edge
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