Dubious records are being set in the financial markets. You have to decide whether you can afford to ignore them.
Gold and silver prices fluctuate greatly. Last Friday, silver fell more than 25 percent, its worst day since 1980, giving up some of the fabulous gains of the past few weeks. The fluctuating prices are confusing companies that rely on precious metals and confusing many investors.
Difficult-to-decipher price signals have emerged far beyond the commodity markets.
As artificial intelligence booms, big tech companies like Nvidia, Microsoft, Alphabet, Amazon, Broadcom, Meta and Tesla have risen so much that the market has crossed a longstanding legal threshold: It is no longer diversified according to the traditional Securities and Exchange Commission standard. The U.S. stock market is more concentrated than it has been since the 1960s, as I reported last week, and investors are taking greater risks than they may realize.
The US bond and money markets are also under stress. The Trump administration’s relentless attacks on the Federal Reserve have made them nervous. President Trump’s nomination of Kevin M. Warsh as the next Fed chair appears to have initially calmed these markets and strengthened the dollar, but also raises the possibility of a protracted fight within the Fed over the framework for setting monetary policy. And the turmoil in bond markets in Japan could spill over into fixed income securities in the United States and elsewhere around the world, as it did last year.
Additionally, reliable government data is becoming increasingly scarce, but economists and market strategists need it to understand the world. The monthly jobs report was delayed again, this time due to conflict within Congress over funding for the Department of Homeland Security. The government is functioning, but a partial shutdown could soon occur again if the underlying problems are not resolved.
And don’t forget about U.S. tariffs, which come and go depending on the changing wishes of the president, the response of other governments and the courts. A highly anticipated Supreme Court decision could derail, at least temporarily, the government’s tariff program, which has led to rising prices and disruptions to long-standing trading patterns.
Wherever you look, there is fear everywhere. Many investors ask a fundamental question: What should I do about it?
The classic answer is: do nothing. Quick reactions to market fluctuations are usually misguided. If you are already sufficiently diversified and have a longer time horizon, your short-term losses can turn into longer-term gains – if major markets recover and you stay the course.
However, this do-nothing approach assumes several things: that your portfolio is already properly constructed and that your asset allocation makes sense. In today’s circumstances, with the U.S. stock market itself less diversified than it has been in more than 60 years, it’s worth rethinking your investment strategy.
This is undoubtedly a time for caution. But that doesn’t mean escaping global markets.
Risk assessment
Asset allocation—choosing how much of your holdings are in important categories like stocks, bonds, and cash—is an important investment tool, perhaps the most important. It is both an art and a science. The so-called 60/40 portfolio — with 60 percent in stocks and the rest in bonds or cash — is a reasonable starting point, but by no means the final word. Adding stocks when you’re willing to take on more risk and adding bonds or cash when you know you’ll need your money soon is an easy way to optimize your asset allocation. Using broad, low-cost index funds as the core of a portfolio has been the scientific recommendation for years.
I think it still works, with some important caveats.
On the one hand, both the US stock market and global markets are highly concentrated. In the United States, the five largest stocks account for more than 25 percent of the total market value; The top 10 account for more than 40 percent. The rise of US technology stocks has created an imbalance in global investment. US stocks now account for more than 70 percent of the value of the MSCI World Index. As recently as 1988, the US weighting was less than half. Spreading your risks across index funds at home and abroad is not a simple matter.
On the other hand, the US government is changing global politics and markets. Mr. Trump and his appointees are deregulating financial markets, obstructing regulators and using them to push administrative actions such as eliminating “diversity, equity and inclusion” in the workplace. The president is consciously changing decades-old trade patterns and international agreements and openly calling for a weaker dollar. Whatever your view on the wisdom of these measures, there is no doubt that global markets are under enormous pressure.
You’ll need to decide whether you’re willing to follow the markets wherever they go, which may mean investing in a broad index fund. There are many alternative approaches. You could choose to pick individual stocks, switch to an “equal-weighted” index fund that ignores the markets’ valuation judgments, or entrust your money to an actively managed fund that emphasizes value stocks that have been neglected by the overall market.
There are countless options, but whenever you stray from core values in major markets, you need to be clear that you are making a choice.
“They’re basically saying the market is wrong,” Rodney Comegys, chief investment officer and head of global equity at Vanguard Capital Management, said in an interview. “Anyone who takes an active position decides that the market is wrong.”
I happen to believe that the market is often “wrong,” at least in some ways. Short-term stock prices often do not align with economic fundamentals, and these discrepancies can persist over long periods of time. Market prices fluctuate with alarming frequency, whether I think they should or not.
But arguing with the market in the long run is another matter.
“If you buy index funds that track the entire market,” Mr. Comegys said, “we’re betting that the entire market will rise 5 to 10 percent per year over a long period of time, given the aggregate profits of U.S. companies and their ability to perform well in the United States capital market system.” What happens to individual stocks and what happens over short periods of time is less relevant to long-term index investors.
He added that you could reduce your risk by holding international stocks and bonds, again using index funds. But you can’t eliminate it and must decide whether today’s market changes require adjustments to your asset allocation.
There is another complication. Rebalancing your allocations doesn’t always make sense if your investments are held outside of tax-advantaged accounts. Selling a highly valued tech stock could result in a huge tax bill. So think carefully before you act.
The Bogle example
Tax concerns aside, this is a wonderful time to adjust as stock markets around the world have performed exceptionally well over the last year. It’s much easier to make changes when you’re sitting on sizable profits than when you’re struggling for balance during a market crash.
John C. Bogle, the founder of Vanguard, which made index funds widely available, provided an interesting example from his own life. He used index funds for his core investments, but was not a purist. Jack, when asked to call him, told me that he also owned actively managed funds and regularly adjusted his own portfolio based on his views on the markets.
But he was careful to make these changes only at the edges—say, adjusting 5 or 10 percent of his overall allocation—adding bonds when he thought it made sense, or taking more risk on stocks when the time seemed right.
I’m primarily a buy-and-hold index fund investor, but I also make small adjustments of my own. Over the last year, I have increased my bond and cash holdings and reduced equities while diversifying my modest holdings across global markets. I’m nervous for sure – bracing for trouble and relying mostly on broad index funds while hoping for a rewarding future.