Saving for retirement today can feel particularly daunting. The days when investors could effortlessly dollar cost average into a no-load index fund and see annual gains of 15 percent are long gone. We now face a vastly different landscape.
With 10-Year Treasury Note yields consistently below 2 percent and the S&P 500 significantly lower than its peak at the turn of the millennium, transforming a small nest egg into sufficient retirement funds seems increasingly unlikely. Yet, despite these challenges, the necessity to invest remains—what alternative do we have?
With Social Security facing insolvency and pension funds struggling, along with a reported inflation calculator indicating a 23 percent reduction in the dollar’s value over the last decade, the pressure to work harder, save more, and make smarter investments has never been greater. Keeping pace with inflation alone presents its own set of hurdles, not to mention the challenge of actually building wealth.
Despite these obstacles, at Economic Prism, we remain undeterred. We greet each day with the enthusiasm of a challenge, rising before dawn to pursue our goals diligently. With dedication and perhaps a bit of luck, we may inch forward from where we began.
Sometimes, however, making progress is simpler than it seems…
Better to be Lucky than Good
Throughout history, there are periods when rising tides lift all boats. In such times, even the least savvy investors can find themselves better off, riding a wave of prosperity without fully grasping the forces behind their good fortune.
Year after year, they witness their mutual funds climb and their home values increase. Eventually, many begin to take credit for their success, offering unsolicited advice to others about their supposed financial savvy.
The unfortunate reality for these individuals is that they may be unaware of their own folly. Yet, we bear no resentment toward their luck; being fortunate is often preferable to being skilled. The crucial point to recognize is that the past decade does not reflect a time of rising wealth. In fact, that tide has been receding.
Nevertheless, an impending stock market inflection point may be on the horizon. It’s hard to believe, and it might not feel as though investing in the stock market is advisable right now. However, shifts are underway that could alter this perception.
An inflection point is rarely discernible in the moment; it often appears as just another data point in an existing trend. It is only in hindsight that we can identify the turning point that was overlooked.
How to Spot a Stock Market Inflection Point
After enduring a twelve-year bear market, significant blows to the housing market, a substantial financial crisis, and ongoing economic challenges, it may seem implausible that a new bull market could emerge. However, if you tune your awareness just right, you might begin to sense a shift beneath the surface.
Identifying a stock market inflection point requires a blend of imagination, speculation, and educated guesses. If you’re open to exploring this idea, consider the following insights:
As reported by Bloomberg, “Valuations for U.S. equities have remained below the five-decade average for an extended period—the longest since Richard Nixon was in office.”
“Analysts forecast that profits for the Standard & Poor’s 500 Index will hit a record $104.78 this year, representing a 125 percent increase since the end of 2009—the fastest growth rate in 25 years. Despite this, the S&P 500 has not traded above its 16.4 average ratio for 446 days, marking the longest stretch since the 13 years that began in 1973.”
This indicates that stocks are currently undervalued, a trend that has persisted for quite some time. Investor hesitance stems from over a decade of stock market losses, rendering the current lower prices particularly appealing for buyers.
This situation contradicts typical investing psychology. While people are quick to recognize a good deal on jeans or electronics, they often struggle with the notion of purchasing stocks at a low price and selling them at a high one.
While the housing market remains fragile, the economy is still under pressure, and government debt issues may lead to sudden stock market downturns, one thing stands clear: stocks are cheap, and in the long run, value-oriented buyers will likely find themselves well rewarded.
Additionally, Federal Reserve Chairman Bernanke has committed to maintaining a near-zero federal funds rate through late 2014. While this may not directly stimulate the economy, it could significantly boost the stock market. So why not take advantage of the current scenario?
Sincerely,
MN Gordon
for Economic Prism
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