Sunday, October 05, 2014

how the game ends

 Here Is What You Should Do

The answer is the same in a bull or a bear market. Try and keep the asset allocation in-line with your individual risk level and try to continue to hold equities at the highest level you can bear. I think the best analogy is baseball. We are in the second half of the bull market. I am not clear if it is the sixth inning or the ninth inning. All I know is that the bull market is more than halfway over.

We still have not seen the euphoria phase of a bull market when caution is thrown to the wind and investors see equities as being risk-free. That stage is still coming and we all know what stage comes after. Despite our knowledge that future market corrections are in the cards, the correct course of action is to hold the stock market.

Additionally, most valuation models -- historical P/E multiple valuation, the FED model, a dividend discount model -- show that the market is very clearly not excessively expensive. Also the market is below its inflation adjusted highs reached in 2000. My gut feeling remains that the bull market has farther to run.

The Next Correction

Thus, my advice is that investors should continue to hold equities but psychologically prepare themselves for a major sell-off. When that sell-off materializes, it is extremely important that you maintain your current equity exposure.

We know how the game ends. It ends with the stock market moving higher over multiple years. In fact, the market will likely double over the next decade. But on the upward trend over the next decade the market must experience some corrections. As I have said many times before, we are overdue for some selling, so don't be surprised when it materializes and do not panic. Continue to hold stocks for the long-run.

I know that ten years from now the S&P 500 will be substantially higher than its recent high because a decade from now corporate earnings will in aggregate be much larger than they are currently. The P/E multiple placed on those aggregate earnings bounces around but remains relatively constant trading within a historical range over time.

As a result, an investor with a time horizon that is greater than a few years should see the recent selling as a buying opportunity. Warren Buffett apparently was buying stocks this past Wednesday and you should be doing so as well. The reason is, of course, that you know how the game ends. The market will march higher over the long-term.

-- Mitch Zacks, ZIM Weekly Update

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