Dubious records are being set in financial markets. You will have to decide whether you can afford to ignore them.
Gold and silver prices are swinging wildly. Last Friday, silver fell more than 25 percent, its worst day since 1980, giving up some of the fabulous gains of recent weeks. The yo-yoing prices are baffling businesses that rely on precious metals, and they are bewildering many investors.
Hard-to-decipher price signals have cropped up way beyond the commodity markets.
In the course of the artificial intelligence boom, big tech companies like Nvidia, Microsoft, Alphabet, Amazon, Broadcom, Meta and Tesla have risen so much that the market has breached a longstanding legal threshold: It is no longer diversified, by the Securities and Exchange Commission’s traditional standard. The U.S. stock market has become more highly concentrated than it has been since the 1960s, as I reported last week, and investors are taking greater risks than they may realize.
The U.S. bond and money markets are under stress, too. The Trump administration’s relentless attacks on the Federal Reserve have put them on edge. President Trump’s nomination of Kevin M. Warsh as the next Fed chair appears to have calmed these markets and bolstered the dollar initially, but it also raises the possibility of a protracted struggle within the Fed over its framework for setting monetary policy. And bond market tremors in Japan may spill over to fixed-income securities in the United States and elsewhere around the globe, as they did last year.
On top of that, reliable government data is becoming scarcer, but economists and market strategists need it to make sense of the world. The monthly jobs report was delayed again, this time because of the conflict within Congress over funding for the Department of Homeland Security. The government is functioning, but a partial shutdown could happen again soon if the underlying issues aren’t resolved.
And don’t forget U.S. tariffs, which come and go, depending on the president’s changeable wishes, the response of other governments and the courts. A widely anticipated Supreme Court decision might, at least temporarily, derail the administration’s tariff program, which has contributed to rising prices and disrupted longstanding trade patterns.
Anywhere you look, anxiety abounds. Many investors are asking a fundamental question: What should I do about this?
The classic answer is: Do nothing. Quick responses to market fluctuations tend to be misguided. If you are already sufficiently diversified and have an extended time horizon, your short-term losses may become longer-term gains — if major markets rebound and you stay the course.
But that do-nothing approach assumes several things: that your portfolio has already been set up properly and that your asset allocation is sensible. Under today’s circumstances, with the U.S. stock market itself less diversified than it has been in more than 60 years, it’s worth re-examining your investing strategy.
This is undoubtedly a time to be cautious. But that doesn’t mean fleeing global markets.
Risk Assessment
Asset allocation — choosing what proportion of your holdings should be in major categories like stocks, bonds and cash — is an important investing tool, perhaps the most important. It is as much an art as it is a science. The so-called 60/40 portfolio — with 60 percent stocks and the rest in bonds or cash — is a reasonable starting point but by no means the last word. Adding stocks when you are prepared to take on greater risk, and adding bonds or cash when you know you will need your money soon, is a simple way of tweaking your asset allocation. Using broad, low-cost index funds for the core of a portfolio is what academic wisdom has suggested for years.
I think it still works, with some important caveats.
For one thing, both the U.S. stock market and global markets are highly concentrated. In the United States, the top five stocks account for more than 25 percent of the entire market’s value; the top 10 account for more than 40 percent. The ascent of U.S. tech stocks has unbalanced global investing. U.S. stocks now constitute more than 70 percent of the value of the MSCI World Index. As recently as 1988, the U.S. weighting was less than half that. Spreading your risks through index funds, domestically or globally, isn’t a straightforward matter.
For another, the U.S. government is changing global politics and markets. Mr. Trump and his appointees are deregulating financial markets, hamstringing regulatory agencies and using them to further administration policies like eliminating “diversity, equity and inclusion” in workplaces. The president is deliberately altering decades-old trade patterns and international agreements, and openly calling for a weaker dollar. Whatever your views on the wisdom of these policies, there’s no question that global markets are under tremendous pressure.
You will need to decide whether you are willing to follow the markets wherever they lead, which is what broad index fund investing may imply. There are many alternate approaches. You might decide to pick individual stocks, or shift to an “equally weighted” index fund that ignores the valuation judgments of the markets, or entrust your money to an actively managed fund that emphasizes value stocks that have been neglected by the overall market.
Countless options exist, but whenever you shift from the core assets in major markets, realize that you are making a choice.
“You’re basically saying the market’s wrong,” Rodney Comegys, chief investment officer and head of global equity at Vanguard Capital Management, said in an interview. “Everybody who takes an active position is deciding that the market is wrong.”
I happen to believe that the market is frequently “wrong,” at least in some ways. Short-term stock prices are often out of whack with economic fundamentals, and these discrepancies can persist over long periods. Market prices fluctuate with disturbing frequency, whether I think they should or not.
But arguing with the market over the long haul is a different story.
“When you buy index funds that mirror the entire market,” Mr. Comegys said, “we are betting the entire market will go up, 5 to 10 percent annually, over a long period of time, given the compounded earnings of U.S. companies and their ability to do well in the capital market system of the United States.” What happens to individual stocks, and what happens over short periods, is less relevant for long-term index investors.
He added that by holding international stocks and bonds, again using index funds, you could lower your risk. But you can’t eliminate it, and will need to decide whether today’s market shifts require adjustments in your asset allocations.
There’s another complication. Shifting your allocations isn’t always wise if your investments are held outside tax-sheltered accounts. Selling an enormously appreciated tech stock could lead to a huge tax liability, so think carefully before acting.
The Bogle Example
Tax concerns aside, this is a marvelous time to make adjustments because stock markets around the world have performed splendidly over the last year. It’s far easier to make changes when you’re sitting on handsome profits than when you’re flailing for balance during a market crash.
John C. Bogle, the Vanguard founder, who made index funds widely available, provided an interesting example in his own life. He used index funds for his core investments, but he wasn’t a purist. Jack, as he asked me to call him, told me that he held actively managed funds, too, and he adjusted his own portfolio periodically, based on his views of the markets.
But he was careful to make these changes at the edges — adjusting, say, 5 percent or 10 percent of his total allocation — by adding bonds when he thought it made sense or taking on more risk with stocks when the timing seemed right.
I’m a buy-and-hold index fund investor primarily, but I make small adjustments myself. Over the last year or so, I’ve added to my bond and cash holdings, paring stocks while spreading my modest holdings across global markets. I’m nervous, sure — preparing for trouble and relying mainly on broad index funds while hoping for a rewarding future.
Jeff Sommer writes Strategies, a weekly column on markets, finance and the economy.
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