Don't Let Market Bubbles Hurt Your Portfolio

The guitar has always been abused with distortion units and funny sorts of effects, but when you don't do that and just let the genuine sound come through, there's a whole magic there.
     - Jeff Beck

Extraordinary Commitment

Since the financial crisis, The Federal Reserve, along with other central banks, have taken coordinated action to support growth. While asset prices have certainly recovered, one wonders what long-term outcomes might be in light of the fact that relaxed monetary policy is not likely to solve structural problems within the global economy or resolve significant debt problems. The Fed's balance sheet has grown to $4.2 trillion, an increase of +$1 trillion year-over-year! Here is a chart that illustrates the actions of central banks impact on stock prices.

fed market bubbles

Discussion continues about the rate at which the Fed should or shouldn't taper or reduce its bond purchasing. Refer to our piece, "Is Fed Chair Janet Yellen Tapering Fast Enough?" Just a few days ago, Yellen said, "I think this extraordinary commitment is still needed and will be for some time, and I believe that view is widely shared by my fellow policymakers at the Fed." Many believe that we face a potentially volatile market backdrop with the possibility of asset bubbles.

Be On The Lookout For Market Distortion

Definition of 'Market Distortion' (Investopedia)

An economic scenario that occurs when there is an intervention in a given market by a governing body. The intervention may take the form of price ceilings, price floors or tax subsidies. Market distortions create market failures, which is not an economically ideal situation.

fed market bubbles

Quotes from the past 18 months:

" distortions and acting on bad incentives are becoming more pervasive. I fear that we are feeding imbalances similar to those that played a role in the run-up to the financial crisis."
     - Federal Reserve Bank of Dallas President Richard Fisher

"All the money printing in the developed world is causing distortions everywhere including China."
     - Jim Rogers

"We must not ignore the possibility that the low-interest rate policy may be creating incentives that lead to future financial imbalances."
     - Kansas City Fed President Esther George

"There are extreme market distortions occurring due to the unusual monetary policy."
     - Lawrence Goodman, former director of Quantitative Policy Analysis at the U.S. Treasury

"Markets are highly connected and highly interrelated so a severe spell of financial instability obviously would be much broader than the markets in which we are making the purchases."
     - Dennis Lockhart, president of the Atlanta Fed

"The distortion last year was in the long-end of the curve. Now the distortion is in the front end of the curve."
     - Rick Rieder, chief investment officer of Fundamental Fixed Income for BlackRock

"The Bank of Japan’s massive bond-buying binge is creating all sorts of market distortions. The latest: the rate in one funding market fell briefly below zero."
     - WSJ

Tread Wearily

We know from past experience market bubbles that burst can significantly hurt your investment portfolio and savings. The internet/tech bubble (1999), the US real estate bubble (2005-2006), the commodity bubble (2011-2012), and the bond bubble (2011-2012). Even if central banks' actions continue to drive stock prices in the near-term, eventually risk outweighs potential reward. It just might be a good time to mentally prepare yourself and keep some cash available that can be redeployed at lower prices. Asset Protection 101: Enhancing returns with a prudent bear market strategy

Morgan Housel authored an excellent article at Motley Fool entitled, "Why Markets Will Always Crash." In it, he reminds everyone:

Markets crash all the time. You should, at minimum, expect stocks to fall at least 10% once a year, 20% once every few years, 30% or more once or twice a decade, and 50% or more once or twice during your lifetime. Those who don't understand this will eventually learn it the hard way.

HIring an Advisor Checklist

Are you bullish or bearish on the stock market in 2014? Are you concerned about bubbles or market distortions?

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About the Author: Andrew Wang

Andrew Wang


Please remember that past performance may not be indicative of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Runnymede Capital Management, Inc.-"Runnymede"), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful.  Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions.  Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Runnymede.  Please remember that if you are a Runnymede client, it remains your responsibility to advise Runnymede, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Runnymede is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the Runnymede's current written disclosure Brochure discussing our advisory services and fees is available for review upon request. Please Note: Runnymede does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to Runnymede's web site or blog or incorporated herein, and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly.

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