It’s hard to love a good bull market—if you’re out of the market, invested in cash or other assets, it’s frustrating to wait on the sidelines for better buying opportunities. You see the neighbors enjoying the gains, but you’re stuck in place. Meanwhile, if you’re fully invested, you’re always on edge that the bull market will give up the ghost. Should we stay in, should we get out?
Prior to the current run, dating back to 1932, there were eleven bull markets, lasting an average of five years. But we’re nowhere close to the longest yet; the run from December 1987 to March 2000 lasted more than 12 years.
Our view is that you should ignore all of this. If you think appropriately about your investment time horizon, you should invest your assets in a mix of stocks & bonds and ignore the intra- or inter-year fluctuations in the market.
If you’re out of the market because you’re afraid or you have a shorter horizon, you should invest in a healthy mix of investment-grade bonds (fixed income), with a smaller but still meaningful allocation to globally diversified stocks. If you have a short horizon, make sure you’re taking sufficient and appropriate risks.
Where do U.S. markets stand today?
The US stock market remains on a tremendous seven-year run from the depths of early 2009. Equities wobbled for the first six weeks of 2016, down nearly 10%, but rebounded completely by the end of March.
S&P 500 performance from January 4, 2016 to April 6, 2016
Even with this volatility, it has continued to prove very hard to be a good stock picker. Fewer than 20% of large-cap active managers beat the S&P 500 in the first three months of the year. The experts do not reliably beat their benchmarks, and even acknowledging that they win sometimes, they on average do not do so by sufficiently large margins over the long-run to justify paying their high management fees.
As a result, we recommend a more strategic approach: buy low-cost index funds, diversify your investments across many asset classes, and patiently take the long-view. This is the SigFig approach: we invest our clients’ assets in diversified portfolios that make sense for their financial goals and time horizon.
International markets: slow growth, choppy markets
On the international front, developed economies are still growing, albeit very slowly. Weakness in these economies has been met with European and Japanese versions of quantitative easing as central banks attempt to stave off recession. Though they have not yet completely rebounded from the early 2016 swoon, developed international markets cut their losses over the last several weeks.
Meanwhile, emerging markets hit hard by declines in commodity prices have stabilized. The skid in oil prices has stopped, but low commodities prices have kept a lid on economic growth. Nonetheless, emerging markets stock performance bounced back after falling off more than 10% to start the year.
(Chart illustrates the price return of VWO and VEA. VWO is the Vanguard Emerging Markets Equities Index ETF; VEA is the Vanguard Developed Markets Equities Index ETF; measured from January 4 to April 6, 2016.)
The future is unpredictable, so it’s wise to have exposure to many different markets. The SigFig strategy is to diversify its clients’ assets across the globe, with exposure to both developed and emerging markets.
Fixed Income: interest rates are going to rise, but possibly slower than you think.
At the end of 2015, the Federal Reserve announced its first rate hike in seven years. Since then, the question remains how quickly the Fed will continue to raise rates to bring them in line with historical norms.
(This chart illustrates the price return of AGG, the iShares Investment Grade Fixed Income Index ETF from January 4 to April 6, 2016.)
Fed Chairwoman Janet Yellen indicated in her February congressional testimony that the Fed will increase rates slowly, but it appears reluctant to push too hard on interest rate hikes at the risk of stalling out the US economy. Related to these muted expectations about rate increases, investment grade fixed income prices continue to creep up, as market observers temper their expectations about future rate changes.
Stay appropriately diversified; focus on the right time-horizon
As we have consistently stated, the SigFig approach is to stay committed to a diversified portfolio whose risk is appropriate to your investment horizon. Identify the right mix of asset classes to deliver the right amount of return to meet your investment goals while not too risky for your personal comfort. (Retake our risk questionnaire to make sure your risk tolerance is set correctly!) Then invest in low-cost index funds that give the exposure to a broad set of securities within an asset class. This is the research-backed way to build your investment portfolio.
Aaron Gubin leads research for SigFig’s Wealth Management team. He holds a Ph.D. in Finance and taught investments and portfolio management to graduate and undergraduate students before coming to SigFig. His research focuses on asset allocation, behavioral finance, and investment management.