Over the past year, and even more so over the past few months, the doomsday predictions of a major market decline have picked up. While these predictions aren't necessarily new, it seems to be occurring more frequently and that is bothersome. We all know that markets go through cycles. The odds of exiting before a crash and re-entering after is extremely difficult, if not impossible to time. In 2012 many of the same doomsayers were recommending selling stocks and buying gold while some went as far as recommending investors to short the equity markets. That has turned out to be nothing short of a disaster. So much money has been "lost" by listening to this market timing advice.
One of the more recent "alarm bell" is household debt levels and the fact that we've surpassed 2008 levels. One needs to look at the bigger picture to gain a more clear understanding before jumping ship based on this information. While household debt has surpassed 2008 levels, the increase in household net worth far surpasses that. Also, debt per capita has fallen from $53k in 2008 to roughly $48k along with a steady decline of household debt as a percentage of GDP. Even more encouraging is the percentage of 90+ days delinquent debt balances has been steadily declining from 2009, minus student loans. As lending standards have increased, the overall quality of the debt has improved which is much different than 2008. Roughly 13% of first mortgages issued in 2008 were to applicants with sub 620 credit scores, while today that percentage is ~6%. While rising student loan debt is a legitimate concern that needs to be considered, it accounts for less than 10% of the total debt. This is not to say we are out of the woods, but the bigger picture paints a different story. While it's true that a lot of debt was financed at record low interest rates and when rates rise, refinancing will be extremely challenging, this is not an immediate concern.
Don't get me wrong, aside from household debt level concerns, many other risks loom ranging from geo-political, central bank monetary policy, attempting to normalize interest rates and the constant flux in the executive branch of our government. These are all legitimate concerns but are not signs to sell everything you own.
We believe the best strategy is to maintain a proper cash reserve (6-8 months of expenses) and a separate low risk investment portfolio for any money needed within the next year or so. This could help keep your mind at ease and help eliminate panic moments when market gets volatile. Investors should be reviewing their risk level and comparing it to their portfolios to make sure they align with one another. If equity markets continue to churn higher over the next six months, rebalancing and adjusting ones portfolio is adviseable. It is important to remember those making bold predictions typically have their own agendas and rarely does that align with a long term investors. If we can keep you globally allocated through any turmoil we believe you will lose far less than trying to time getting in and out of the markets.