Newsletter of Danny Merkel - Issue #124
Market Review:
A central theme this year has been that this isn’t a normal bull market.
This fact can most clearly been seen through the lens of small-cap stocks, but even if you look at the big, blue chip DJIA, it appears that something ain’t quite right in America.
The DJIA continues to trade lower today than 2 years ago. During the past 2 years, the price action has been extremely erratic and volatile.
To smooth things out, you could normally use long-term moving averages - such as the 100 & 150 (shown below) - but the market has been so choppy for so long that even this long-term trend-following approach fails:
Another clue that something ain’t quite right is that the traditional 60/40 portfolio isn’t working.
The retirement dreams of millions of people is based on the foundation that if you invest in a diversified portfolio of stocks and bonds, then you’ll earn a steady growth rate of say 7 or 8% and thanks to compound interest, a golden retirement awaits when one reaches old age.
In this model, all market corrections are quickly recovered and there is no major inflation along the way.
In order to test this model against reality, let’s look at an interesting ETF.
Trading under the symbol AOK, the iShares Core Conservative Allocation ETF replicates the traditional 60/40 portfolio by investing in a diversified basket of stocks and bonds.
In order for the retirement-dream-model to work, the 60/40 portfolio needs to produce real, inflation adjusted gains.
And that’s not happening. The faithful investor who has diversified, reinvested every dividend and has held through every correction has made absolutely nothing on an inflation adjusted basis going back to 2015.
I would even argue that since inflation is created by government through increasing the money supply (few understand this) and since the government is also responsible for measuring the very inflation that they themselves created, the CPI represents a conflict of interest and chronically understates the true rate of inflation, but I digress…
The point is that trusting the government, trusting the system or trusting your financial planner isn’t working. You need to take matters into your own hands. That is why I learned how to trade.