Bubble, Bubble, Toil and… Trouble?

That all changed yesterday when the Fed gave the world a clear sign that they had begun the sequence of slowing down and eventually shutting off their artificial manipulation of interest rates thus allowing market forces to eventually control rates again, which means they may be much higher. Up until yesterday, that would have been considered a negative by most logical investors, and therein lies the problem. Market bubbles are never logical and neither is this one. So what does all this mean to your retirement strategy and your overall wealth plan?

Think about how long this stimulus has been going on. It started with the bailouts. Then we had QE1. That did not work so we went to QE2. That did not work so we went to Operation Twist. That didn’t work so we went to QEternity (QE3). Since QE3 had no end date, you knew that Mr. Bernanke would have to begin some kind of exit. When the date finally came, the market celebrated and went up 300 points. It is arguably the opposite of what I would have thought it would have done. Then again, I am using economics and logic to make my predictions, and that has not worked too well in this market run.

It’s easy to forget a few economic basics when the music is pounding and the dance floor is full of happy people like…

  1. Our current unemployment rate is the highest in history this long after the supposed end of a recession. Today’s fifty million people on food stamps is the highest in the history of the program.
  2. The average American family makes $4,000 a year less in total household income today as they did in 2007 before being adjusted for inflation and yet the Wall Street driven machine known as the stock market paints a much different picture.

There is a simple message that I want to leave you with today: If your investment game plan is the same today as it was in 2008, you are going to get crushed again when the market collapses. After doing this for 32 years, I have no idea when that is going to happen but be careful of getting lulled into a false sense of confidence. Wall Street bets on your thinking the market has made it back to even this year and now the sky’s the limit. Now is probably not the time for celebration or for taking more risk. It is time to take a serious look at how much risk you are exposed to and how your portfolio will react when whatever it is that causes the house of cards to crumble. It’s not something that you already know that is going to crash the party. It’s something you don’t know. It will not be a bad unemployment number or more government manipulation or another Wall Street company getting smacked on the wrist for fraud, it will be something unexpected. And when that black swan swims into the lake, the bubble will burst like it always does.

If you have enough confidence in your current advisor to get a second opinion on how you are approaching your investments, with no cost or obligation, I will personally review your current holdings and tell you where your biggest risks lie and how you can protect yourself. From there, you can do what you want with the information.


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