As an ex bond trader on Wall Street, I can tell you that the retail investor gets hosed. When I say retail, I mean the Mom and Pop investor who pays full price or retail for stocks and bonds, like they do for cars, tires, and other products. The investment world is split between the institutional smart money and the retail patsy. It’s unfortunate, but it’s true. The internet and the discount brokerage industry have tried to change this Wall Street truism and have succeeded somewhat in leveling the playing field. However, you have to have knowledge to effectively use discount services; and most individual investors just don’t have it.
Let’s take the current situation in the stock market.
Equities have been on a one way trip higher for some time now, years in fact. It’s all driven by the Fed keeping interest rates low and pumping printed money into the economy. At some point, the money has to be taken out, and interest rates will rise. No matter what anyone says, it’s not different this time. When interest rates rise significantly, the stock market sells off.
Yes, over the long term, it’s probably good for markets to get used to higher rates as it signals a healthier economy. But in the short-run, they will sell-off. The institutional money has already planned and prepared for this eventuality. They have hedged their portfolios or just simply sold at the top in this market. On the flip-side, the retail investor is just now getting brave enough to stick his toe in the markets after the destruction of capital in the financial crisis late in the last decade. Or maybe he got back in a couple years ago, only hesitantly, and now thinks he can sink his whole IRA in the equity markets because they only go up, right? Wrong!
Watch out, my friends; these are dangerous times. To use a phrase Alan Greenspan so prophetically termed prior to the markets becoming unglued in the last decade, we are seeing irrational exuberance. Markets can and will come down.
Perhaps we have a long time still to climb the wall of worry. However, investors need to be asking themselves: how much can I afford to lose if the market sells off? If you can’t afford to lose money in here, get out of the equity market. Take your profits. Or, resist the urge to go all-in here. The smart money is looking for retail investors to sell their stock to. Don’t be that guy!
And don’t buy long term fixed income in here either. Interest rates only go from twenty percent to almost zero once in a lifetime. We have some de-leveraging to do, and the bond markets are gonna get hit. I remember very well in 1994, my first year in the business, when the average bond investor in “safe” bond funds lost thirty percent in a few weeks. Keep your powder dry, folks; you’ll have an opportunity to get in the markets at some point in the near future. You’ll know when that time is.
If you don’t think you will, keep reading The Haven!
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This post originally appeared on Western Journalism – Informing And Equipping Americans Who Love Freedom