Selected Retirement Start Dates (Examples Age 35 to Death) And More

Selected Retirement Start Dates (Examples Age 35 to Death) And More

“In the short run, the market is a voting machine but in the long run, it is a weighing machine.”

– Benjamin Graham

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Walter Schloss

When Ronald Reagan entered office in 1981, forward return expectations were a high 18.91% (see chart below: green line, left-hand side).  Equally important was that risk of loss was a low -4.29% (red line, left-hand side).  The prior bear market reached its end, yet few knew it.  Scream as one might, clients weren’t buying.  The 1966-1982 secular bear market did little to advance an equity market investor’s wealth.  In 1981, it was the right time to aggressively own equities.

Today we sit on the opposite end of the seesaw.  With valuations high, forward return probabilities near 0% (-0.35% green line, right-hand side in the following chart) and risk of loss at -27.07% (red line, right-hand side), President Donald Trump will have a great deal of trouble making stock returns “great again.”

I’m rooting for tax cuts.  But to project the great returns of the Reagan days is a risky wager.  Risk versus reward?  Zero percent forward probable returns and risk near -30% is a really bad bet.

The above chart compares five-year average total returns of the S&P 500 Index and the maximum drawdowns that have occurred over the last 60 years at associated CAPE readings.  (CAPE is the cyclically adjusted price-to-earnings ratio, commonly known as CAPE, Shiller P/E, or P/E10 ratio, is a valuation measure usually applied to the S&P 500 equity market.  It is defined as price divided by the average of 10 years of earnings (moving average), adjusted for inflation.)

The following is from 720Global:

Despite the bargain basement equity prices, few investors believed that market trends would reverse. Equity valuations had been low and falling for so many years to that point, the trend became a permanent state in many investors’ minds by way of linear extrapolation.

Contrast that with today. As in early 1981, there is a new president in office with a non-typical background presenting non-conventional economic ideas to aid a struggling economy. Unlike Reagan, however, public support for Donald Trump is marginal.

Additionally, while Reagan’s and Trump’s economic policies may have similarities, there are stark differences between the economic landscapes that prevailed in the early 1980s and today.

Equity investors betting on Reagan in 1981 were investing in an environment where the probabilities of success were asymmetrically high. With Cyclically Adjusted Price-to-Earnings (CAPE) ratios below 10, investors could buy in to a stock market whose valuation on this basis had only been cheaper 8% of the time going back to 1885.

Given the likelihood of success as inferred from valuations, investors did not need much help from Reagan’s policies. Current equity market valuations require investors to believe beyond all doubt that Trump’s policies can produce strong economic growth and overcome hefty economic and demographic headwinds. More bluntly, the risk-return profile of 1981 is the polar opposite to that of today.

You can read 720Global’s full piece here.

Like tech in 1999, scream as I did then, it was not enough to stop my 68-year-old client Roberta from transferring her account to a broker.  Her new broker was putting her into as she told me then, “safe stocks.”  By October 2002, her $1,000,000 turned into $500,000.  I know this because her husband remained a client.  After adjusting for inflation, it took her 15 years just to get back to even; assuming Roberta was able to stomach the ride and if she didn’t need some of that money for retirement.

It looked like this (inflation adjusted).


Last Monday, the VIX broke below 10 to close at 9.77, the lowest level in more than a decade.  There are only three other days the index has closed at lower levels, all of them in December 1993.  Investors are complacent to risk.  They shouldn’t be.

What can you do?  Put some form of stop-loss risk management process in place.  A little more than three years ago, I approached Ned Davis Research with an idea.  I wanted to create a U.S. equity market indicator similar to Ned’s famous “Big Mo.”  “Mo” is short for momentum.  I love NDR’s work and I have been a happy client for years.  Their services are not cheap, but it is an expense I am happy to pay.

We co-created something we call the Ned Davis Research CMG U.S. Large Cap Long/Flat Index.  I previously used Big Mo and it’s a good indicator, but I now use the NDR CMG U.S. Large Cap Long/Flat Index to guide me in my long-term focused stock market exposure.

My point in mentioning this is that, despite my risk versus reward concerns, my defined equity market exposure (30% in moderate risk portfolios and 70% in aggressive risk portfolios) remains “risk on” and fully invested.  Find something that works for you.  Something that you can have full conviction in… then stick to the process.  For your core portfolio allocations, you could diversify to several global ETF trading strategies.  Broad diversification is key.  On the other side of the next recession is the next great equity market opportunity.  It is not today.

The impact of losses, in any given year, destroys the annualized “compounding” effect of money.  It takes a return of 25% to overcome a loss of 20%.  That’s doable and generally doesn’t take long to recover.  It takes 100% to overcome a 50% loss and it takes 300% to overcome a 75% loss. Move forward carefully.

Roberta lost 50%.  Others back then were ‘all in’ on tech stocks.  They lost 75%.  We’ve had one or two recessions per decade over the last 100 years.  The last one was in 2008/09.  Maybe this decade is the exception, but I doubt it.  In recession, it is normal to experience a 40% decline in stocks.

“Those who do not remember the past are condemned to repeat it.”

? Benjamin Graham, The Intelligent Investor

Reagan had a great deal of wind at his back.  Trump does not.  Let’s get excited about tax cuts (after this past week that task may be tougher to achieve), but keep proper perspective about risk and reward.  As the great Art Cashin says, “Stick with the drill – stay wary, alert and very, very nimble.”

When you click through below you’ll find a link to Trade Signals as well as a few charts I found interesting and I believe worthy of your review.  Also, the NDR CMG U.S. Large Cap Long/Flat Index is posted on our website every Wednesday in Trade Signals. Thanks for reading.  I hope you find On My Radar helpful for you and your work with your clients.  And please feel free to reach out to me if you have any questions.

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Included in this week’s On My Radar:

  • Rate Hike Next Month is a Near Certainty
  • U.S. Equity Market Capital Flows – To Large Cap Stocks (It Remains “Risk On”)
  • Charts of the Week
  • Trade Signals — Cyclical Equity Bull Market Remains Dominant Trend
  • Personal Note


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