Here’s a scary fact: By 2019, your retirement will be worth exactly what it is worth today … at best.
Almost half of the working population in the United States (approximately 73 million Americans) has a 401(k). The average balance of that 401 (k) is $45,519, and 46% of all accounts have less than $10,000 — hardly enough for retirement, unless you plan on existing on a reduced standard of living at retirement.
You may be thinking you’ve got plenty of time, but I’m sorry to tell you that the next 10 or 20 years will be a period of long-term consolidation for the stock market — meaning, it will ultimately trade sideways and end up in the same place it started.
If you’re like most retirement account holders, you’re passive, your 401(k) is largely tied to the general stock market, and you’re still in shock, trying to digest what recently happened and what the future holds.
You’re not alone. We are right in the middle of a “transitional period” for the economy and virtually all financial markets, so investors are experiencing the highest level of confusion we have seen in generations.
If you think we will recover and just move on as usual, you can forget about that right now.
Banks are rehabilitating their balance sheets (by not doing any significant lending), and the sector is in the process of de-leveraging. As a result, you’re going to see lower growth, lower investment and nominal GDP.
There are solutions to this nightmare of a problem, but unfortunately, only some of you will have the understanding you’ll need to adapt to the new economy, and the new market opportunities.
Take a good, hard look at the chart below of the Dow Jones Industrial Average (DJI) from 1965 (when it was at 874) through 1981 (when it was at 875).
So, you could have held a portfolio of stocks that mimicked the Dow for 16 years, and you would have made 1 point. That’s a long time to wait for a point!
It’s almost a certainty that the stock market will look similar to the chart above for the next 16 years. That’s FINE, and could be a very profitable market to play in, as long as you aren’t considering the “buy-and-hope” strategy that worked for the last quarter-century. Instead, you should focus on making “Quantum returns.”
What Are ‘Quantum Returns’?
In 1970, Jim Rogers and George Soros founded the “Quantum Fund.” During the following 10 years, the portfolio gained 4,200% while the S&P 500 (SPX) advanced about 47%.
It’s all about trading in the right asset classes, and having just a BASIC understanding of technical analysis. There are simple and easy-to-understand strategies that you can use to know when to be bullish on a market as it’s advancing, and even profit when it’s declining, so you’re not one of those people with a stock account that’s worth the exact same amount as it was 10 to 20 years prior. (Learn how to predict the market’s next move.)
And, by the way, we have never had a period of time where the government prints lots of cash (as it has just done) that wasn’t followed by inflation. The United States is likely going to end up seeing runaway inflation. So, even though most people will end up with the same amount of money in absolute terms, that money might be able to buy you half as much stuff! (Learn 7 Ways to Hedge Against Inflation.)
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Need More Convincing?
Look at the chart below that dates back to 1901. It’s clear that long periods of economic expansions are followed by long periods of consolidation (trading sideways).
What’s more interesting is that, if you compare the booms (green) to the consolidation periods that followed (red), you can see that, after very long-term stock market advances, the market generally takes about twice as long to consolidate.
You can even look at the boom and consolidation period within the 1929-1954 “consolidation period” (if you want to call it that), and you can see that the huge gain from 1933-37 (yellow) took nearly three times as long to consolidate (blue).
Even if the recent expansion, from the early 1980s to the recent 2007 top, takes HALF as much time to consolidate (as opposed to the historic 1.7 to 2.88 of the time), we wouldn’t revisit the 2007 high until 2019.
Some of you reading this article can’t envision a market that doesn’t advance over the long term. Who can blame you? Many of you weren’t watching the market prior to 1981.
But the 24-year trend occurred because of corporate profits that were largely a function of cheaper and cheaper financing, and higher and higher leverage, combined with increasingly complex financial innovation and loose regulation.
This enormous bull market was also launched after a transition to low inflation and declining interest rates, beginning in the late ’70s.
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You Must Adapt if You Want a Comfortable Retirement
Now that we are IN THE MIDDLE OF the “worst crisis since the Great Depression,” you are going to have to do something that investors haven’t had to do in 40 years: You’re going to have to shift your mindset away from the way you’ve been trained to view the stock market during the last 25 years (for some, including me, that’s as long as you can remember investing), and adapt to the new stock market — one similar to the market from 1966-83, or perhaps a better parallel would be the 1937-38 period.
After a three-year stock market massacre (from late 1929 to late 1932), we had a massive four-and-a-half-year rebound. The market would rally off of vast government expenditures and monetary kayos.
It was an artificial recovery (similar to what we are seeing today). The economy went downhill again beginning in 1937-38 (followed by a brief rally and another four-year sell-off) because we didn’t encourage private enterprise.
And the reason I think this time frame is a better comparison is because now we are seeing the same thing we did then.
We have interest rates at nearly zero (and a strong fight by global governments to keep that intact for as long as possible), and massive economic stimulus by the government into the economy. (So, the gains are artificial, and Uncle Sam will eventually stop the massive “stimulus” that’s causing the stabilizing economic mirage.)
As a side note, notice the three colorful squiggly lines in the chart above. They represent the market’s price-to-earnings (P/E) ratio (the multiple to earnings that the stock market is priced at) at 10 (green: historically undervalued), 15 (blue: historically fair value) and 20 (red: historically overvalued).
When high growth is expected, the market trades at higher P/E ratios. When lower growth is expected, the market trades at lower P/E ratios.
So notice how, after 1938 — the period in which the government propped up the economy (just like today) — investors weren’t willing to pay high multiples-to-earnings, with the exception of an 18-month period.
Sure, we have fiscal stimulus working in our favor, now. And we see early signs of a rebuilding cycle in play as well. But there is no motivation for the last key ingredient needed for stock market strength: private demand, whether it be consumption, exports or investment.
Now that the “expansion” phase had ended, it appears we will transition through a new period — a revised version of globalization, re-regulation and de-leveraging — and that’s not the right environment for the economic airplane to take off.
Even when the current economy is seeing GDP growth quarter-over-quarter, the big picture is the United States becoming totally addicted to the current policy framework.
What you’ll see, just like the late 1930s through early ’40s, is massive reliance on the government, followed by fiscal policy tightening to fight the inevitable inflation, and a country where private enterprise has been completely discouraged.
To put it simply, here’s an analogy: The economy doesn’t REALLY pick up again until the kid, who always had mommy and daddy paying his way, decides he is uncomfortable enough to get up and start a business of his own.
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What’s an Investor to Do?
Don’t despair! Being forced to have your retirement account pegged to one of the major stock market indices such as the S&P 500 or Dow-30 is a thing of the past. This isn’t the old days where your financial hands are tied.
There are plenty of other asset classes that will give us explosive opportunities, and if the stock market is your place of comfort, or if your 401(k) plan is restricted to the stock market, that’s perfectly all right, too. You can make huge profits by TRADING the stock market instead of the buy-and-hold strategy that worked for the last few decades.
Before the roaring ’90s, the stock market was a place that seemingly was meant for only the wealthy. We won’t go back to that way of thinking, simply because of the access to information and education that you now have at your fingertips.
Look again at the chart from 1965-’81. What do you see?
I see nine opportunities:
- Four major long-term downtrends (red arrows) — profitable for bearish positions.
- Four major long-term uptrends (green arrows).
- And perhaps the best part: one zig-zagging sideways trend — a premium-collector’s dream (think options).
Most individual investors will look at their retirement accounts and regular accounts in the next 10 to 20 years, and the value won’t be much different from today’s value.
You, on the other hand, can make “Quantum returns” in the same time frame, if you know how to view and trade the market.
Remember, Jim Rogers and George Soros made 4,200% from 197080 when the market gained 47%.
How’d they do that?
The secret to making “Quantum returns” is to stop believing in “the market.” If someone asked you what “the market” is doing, you’d probably tell them about an index of 30 stocks known as the Dow Jones Industrial Average.
Most unsophisticated investors believe they are at the mercy of this basket of securities. GET THAT OUT OF YOUR HEAD RIGHT NOW.
You can free yourself financially if you understand two things:
1. Understand that financial markets are broken down into many different categories.
You can trade stocks, bonds, currencies, etc. If you find, at the time, that equities (stocks) are where the strength is, the first thing you would do is find out which of the global markets are the strongest (United States, China, Brazil, etc.).
Then you should find out if the strength is in large-cap stocks, mid-cap stocks or small-cap stocks.
If it’s in large-cap stocks, is the strength in large-cap value or large-cap growth? If it’s large-cap growth, is it in financials, energy, technology, etc.? If the strength is in large-cap growth tech, would that be in software, semiconductors, computers, Internet, etc.?
Zooming back out, you have to view the financial market as a place that offers you many choices. You don’t have to be in stocks. For instance: When we experience runaway inflation, you’ll make Quantum returns in commodities.
2. Understand how to identify where the strength or weakness is found.
Whether the strength is in stocks, commodities, bonds or currencies, you can use basic technical analysis to spot the trend. And the trends you’ll find will usually stay intact for a significant period of time.
You don’t have to find strength in a group to make money — you can make just as much money by identifying weakness.
If you have a 401(k) that’s very restrictive, only allowing you to invest in a handful of equity funds, don’t sweat it! Once you understand how to view the market (one that offers you many choices on where to put your money), you’ll know how to work that angle, too.
You can chose to invest in the funds, offered by the 401(k) plan, that are more likely to show the most relative strength. And when the market starts reversing lower, you can move out of that fund and into a money market account (which is similar to cash) until strength returns.
Use the current economy’s “transition period” that I mentioned to educate yourself on how to break down the market. Don’t sit there with your retirement at the mercy of a couple of indexes that are known as “the market.” Those indices are nothing more than a distraction that are being used to manipulate market psychology like shaking shiny keys to distract a kitten.
Don’t fall for it. Don’t let them play you. Start studying and play the markets.
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