posted on March 5th 2017 in LA/OC CFP Team Posts & Your Financial Advisor with 0 Comments /

How is today like 1997?

Take a look at the following graph. The top two lines are U.S. stocks, large and small. Over the past seven years, they have far and away outrun the light blue line, which shows international stocks.

2010 to 2016

image00
Source: Russell, Standard and Poor, Morgan Stanley Capital International. Charting software courtesy Dimensional Fund Advisors.

See if this graph, for 1990 to 1996, looks similar.

1990 to 1996

image01
Source: Russell, Standard and Poor, Morgan Stanley Capital International. Charting software courtesy Dimensional Fund Advisors.

In each case, U.S. stocks are about 2.5 times higher than where they started. And international stocks are only up around 1.3 times.

ISN’T THIS JUST A COINCIDENCE?

Of course we can’t draw a strict comparison. The world has changed in so many ways since 1999!

But I wonder. If U.S. stocks have moved so far ahead of all the other stocks around the world, are they still rationally priced? Do we really have the world by the tail, and will our stocks continue to press forward? Or will our stocks go sideways, while international stocks benefit, perhaps from Europe favorably resolving some of its current uncertainties?

We can’t know how long the U.S. stocks will dominate. Nor how long stocks will continue to go up overall. One day, things will go the other way. As John W. Campbell is alleged to have written, “History doesn’t always repeat itself. Sometimes it just screams, ‘Why don’t you listen to me?’ and lets fly with a big stick.”

Statisticians call this “mean reversion.” It sure feels mean when it happens to you!

SO WHAT SHOULD WE DO?

We recommend our clients remain diversified. Our ongoing rebalancing means we take profits in asset classes that have done well, and store the proceeds in fixed income or use them to buy assets that are “on sale” (i.e., relatively less expensive). We are pleased with the results, and we think you will be, too.

If you’ve been betting heavily on the S&P 500, or even a broader group of U.S. stocks, it may be time to party like it’s 1999. (By that I mean diversify.) Experienced advisors know not to confuse luck with smarts and discipline.

After 1996, there were three more years of fantastic U.S. stock returns before a nasty crash. There were a lot of smart people too heavily invested in trendy growth stocks during the dot com crash. And there were a lot of smart people too heavily invested in other trendy growth stocks during the financial crisis.

TIME TO GET SMART

If you’ve been lucky managing your own investments, maybe it’s time to get smart, too.  History is screaming at you. Can you hear it?

Contact us at WorthPointe, and let’s talk about how we can help you prepare for whatever is coming. We look forward to listening well and providing great advice.

about the author: WorthPointe Wealth Management

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