Stay in Equities? Would you drive off a cliff?

It’s time again to send up a warning flare. Markets haven’t really responded to warnings from Warren Buffet about bonds, and quotes like the following are becoming more abundant:

“Stay invested in equities. The break to all-time new highs in many stock markets suggests that the recent pullback is complete. We believe the higher lows in many markets speak to the strength of the medium-term bull trend that has been unfolding since 2009.”

What was just experienced was a hiccup, not a ‘pullback’. For the most part, I am in agreement (and wrote about it back in 2009, rather than in hindsight) that we are in a long bull trend – both global economy and markets. However this does not mean you should ‘stay’ with any asset class. Advice from large financial firms is always suspect. This quote is from A Maverick Investor’s Guidebook:

The larger banks and insurance companies, most now owning their own investment dealer subsidiaries, would like nothing better than to have your investments less volatile and secure even if they don’t grow at all. If your money just stays put, they can consistently charge you fees, forecast their revenues based on those fees, and invest revenues in real estate and other assets that will make more money for the firm.

I am not being critical of these companies, just realistic. All the services they provide (consumer and corporate banking, mortgage lending, international funds transfers, and so forth) wouldn’t be available if they weren’t in business, and to be in business requires them to behave as businesses.

Now that there is market activity after years of disinterest from the investing public, no financial services business wants it to end.

If the FED really is considering unwinding its quantitative easing (QE) program, then higher interest rates will impact the value of your investments; their fees will decline, but revenues will surely decline much more if you get out of higher margin securities…..i.e. equities. But as I outlined in an earlier posting – Rising i-rates: More than bonds will get hammered! – it is in your best interest to avoid danger when it’s imminent.

Put another way, you wouldn’t attempt to drive along the Pacific Coastal Highway in a straight line. Similarly, a buy and hold (‘staying’) approach in the markets is likely to end badly.

Why send up the warning flares I mentioned earlier? Over my career I’ve learned to expect trouble when:

Summer is coming!

Interest rates could begin to rise!

So don’t hesitate, if you feel the need to slow down and lean into the curve (sell stocks) it may cost you some commissions but ultimately save your bacon.

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