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You Look Marvelous?

12/29/2016

If somebody said to you that you looked really great today, would you feel good or would you immediately panic that someday you will not look great?

With the market hovering near all-time highs, you would think people would feel good.  Instead, “all-time high” must be some code word for immediate crash.

The market has been hovering just below the 20,000 milestone for ten days now.  Wednesday, it actually had a real “down” day.  Even interest rates dropped.  The sky is falling!?!  This means nothing, and I expect Thursday and Friday will be down days as well.

There is a well-discredited theory on asset allocation that says 90% of investment performance is a reflection of your asset allocation between stocks and bonds.  It is still part of the conventional wisdom for pension funds and institutional managers.  If your allocation is the commonplace 60/40, then your portfolio should be 60% stocks and 40% bonds.  If the stock market rallies and your stocks are now 75% of the portfolio, then you must sell stocks (driving down the price of stocks) and buy bonds (driving up the price of bonds, which drives down the yield on bonds).

Even though January is historically the best month of the year, the first week is often weak because investors wait until the new tax year before incurring capital gains taxes.  It will probably be somewhat worse this time, as investors are expecting lower capital gains taxes with the Republicans in power.

So, when the Dow does break 20,000, will you enjoy the moment or start looking for the apocalypse?   

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