Myers Capital Management

Refocusing Your Future

Refocusing Your Future

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Is It Time To Take More Risk?

February 3, 2021 by Paul Myers, Myers Capital Management

In 2020, we had an extremely deep recession due to COVID 19 and the stock market dropped over 30%.  However, as it has NEVER done before, the market started to rebound just weeks into the recession and did not decline a second time as we typically see in a recession.  In addition, the recession ended with unprecedented economic growth in the third quarter followed by more growth in the fourth quarter.

As I have discussed before, we have been in a secular bear stock market cycle since 2000.  In these cycles stocks tend to go down a lot in recessions, which is exactly what we saw in March 2020.  One way to make more money in these cycles is to take a little less risk when the economic growth cycle gets a little old and to increase risk when stocks go down in a recession and are “on sale”. 

Since stocks rose so fast at the beginning of the recession, there was really little to no time to buy when stocks were undervalued.  However, with the recession in the rear view mirror, it may be time to consider taking more risk if we can avoid a double dip recession.  At this time it does not look like the Biden administration is going to push any further restrictions on the economy.  Because of this as well as the ongoing rollout of vaccines, it seems likely that we will avoid a dip into another recession and can look forward to another economic expansion for a what is usually a number of years. 

With this in mind, this may be a good time to consider taking more risk in your portfolio.  However, there is one thing to consider. Every year there is time when the stock market is down. On the chart below look at the red dots underneath. These are the highest inter year declines in the stock market over the last 40 years. The risk in taking more risk at this time is that the market is fairly expensive compared to current profits so there is a risk of a significant market correction. Model Capital Management, one of the Portfolio Strategists we utilize for client accounts, recently noted that the Shiller Price to Earnings Ratio, one of the many ways to measure whether the stock market is expensive, has only been higher over the last 150 years during the 1999-2001 dot.com peak. At that peak it was about 30% higher than it is today. Some other measurements don’t show that extreme valuation, but the market is still expensive.

However, the economy may very well accelerate as vaccines are deployed leading to a more broad based increase in company profits putting stock market valuations in a better place, which may or may not avoid any significant market correction. Also, even if the stock market corrects downward, with a healing and growing economy, stocks could rebound by year end and still end up positive. The gray bars in the chart above are annual returns of the S&P 500, and most non-recession years returns are positive by year end, despite inter year declines.

As one decides whether to take more risk at this time, or wait to see if there is a market correction and do so at that point, it is important to make sure you do not invest over your overall tolerance for risk. This could be detrimental to your portfolio and therefore your overall financial goals. If you have not evaluated your risk tolerance in the last year, I encourage you to do so before making any changes in your portfolio.

Filed Under: Myers Cap Post

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The Myers Cap Post

  • A Gaze Into The Future
  • Positive News On Company Profits
  • Market Overvalued, But Stocks Are A Leading Indicator
  • Markets Are High… Should I Invest?
  • Unemployment Lowers to 6.3%
  • US Economic Growth Continues in January Despite COVID Woes
  • Is It Time To Take More Risk?
  • Economy Continues to Grow In the 4th Quarter
  • Strange Recession and Recovery
  • Profits Improving But Likely Not Caught Up
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Myers Capital Management (“RIA Firm”) is a registered investment adviser located in Abington. Myers Capital Management may only transact business in those states in which it is registered, or qualifies for an exemption or exclusion from registration requirements Myers Capital Management ’s web site is limited to the dissemination of general information pertaining to its advisory services, together with access to additional investment-related information, publications, and links. Accordingly, the publication of Myers Capital Management ’s web site on the Internet should not be construed by any consumer and/or prospective client as Myers Capital Management ’s solicitation to effect, or attempt to effect transactions in securities, or the rendering of personalized investment advice for compensation, over the Internet. Any subsequent, direct communication by Myers Capital Management with a prospective client shall be conducted by a representative that is either registered or qualifies for an exemption or exclusion from registration in the state where the prospective client resides. For information pertaining to the registration status of Myers Capital Management , please contact the state securities regulators for those states in which Myers Capital Management maintains a registration filing. A copy of Myers Capital Management ’s current written disclosure statement discussing Myers Capital Management’s business operations, services, and fees is available at the SEC’s investment adviser public information website – www.adviserinfo.sec.gov or from Myers Capital Management upon written request. Myers Capital Management 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 Myers Capital Management’s web site or incorporated herein, and takes no responsibility therefor. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly.   This website and information are provided for guidance and information purposes only. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy. This website and information are not intended to provide investment, tax, or legal advice. Insurance products and services are offered and sold through Myers Capital Management and individually licensed and appointed insurance agents.   • Copyright Myers Capital Management
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