What Millionaire Investors Should Do in 2019

Just as I warned at the end of 2005 in my book that the real estate bubble was soon to burst with a recession following, all that I have been warning about in the last year in my new book and on Kiplinger, Yahoo Finance, Fidelity.com, Nasdaq.com, my Blog and other websites has been coming true as well.

It’s now the dawn of 2019, and I want to remind you of my recent warnings:

1. I warned that rising interest rates are typically the pin that bursts debt-fueled bubbles like we’re in now. I’m calling the bubble we’re in now the “Central Bankers Bubble.”
2. I warned that having the majority of S&P 500 stock market gains coming primarily from the 5 FAANG stocks [Facebook, Amazon, Apple, Netflix and Google (Alphabet)] and Microsoft is a recipe for disaster because many investors exiting that sector at the same time would be a bloodbath (i.e., Apple’s 35% drop in the last two and a half months of 2018).
3. I warned that the trade war with China is not a good thing for our economy.
4. I warned that the Fed starting to unwind its stimulus this year would add additional pressure to an overheated stock market.

To remind you, back in the financial crisis of 2009 and for the following several years the Fed was stimulating the economy with numerous stimulus programs, including Quantitative Easing programs (remember QE 1, 2, 3, 4, and Twist?). Basically, the Fed’s 2009 QE programs allowed the Fed to purchase U.S. government bonds in order to flood the economy with money and low-interest-rate credit in order to get people to borrow money at low rates so as to spend money again. This would support our predominantly consumer-spending based economy as 69% of our economy is consumer spending!

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However, the Fed recently started selling those government bonds back into the marketplace. This is bad for this debt-fueled bubble because it decreases liquidity and raises interest rates.

History Repeats Itself

Just like the Dutch Tulip Bubble of 1634, The Railroad Bubble of the 1840s, the Roaring 1920s, the Tech Bubble of the late 1990s and The Real Estate Bubble of the 2000s, all of these bubbles ended poorly. Now we are in the Central Bankers Bubble.

I believe this Central Bankers Bubble is the mother of all bubbles, and because history repeats itself, this bubble will burst as well. We just don’t know when.

Frankly, I find it surprising that people are shocked that the stock market went down substantially two times in 2018. Do markets go up forever? No! Are 13.2% average annual S&P 500 returns since 2009 normal? No!

Our brains are designed to remember the good times and forget the bad times. On the one hand, this is why women have more than one child! Haha. On the other hand, this is also why people believe that markets going up will keep going up… and forget how painful losing 50% was back in 2008-2009.

Remember back in March of 2009 when you probably told yourself or your spouse that if you just got “your money” back, you’d never go through that again? Well, many retirees are further ahead financially than where they were in 2007, so hopefully you’re taking this opportunity (if you’re in or near retirement) to reduce the risk in your retirement portfolio to a level that you’re comfortable with. Remember, it’s not “your money” until you lock in the gains by selling it to someone else.

Never forget the brilliant words attributed to Albert Einstein: “The definition of insanity is doing the same thing over and over again and expecting a different result!”

My Predictions for The Financial Markets for 2019 and Beyond

Obviously, no one has a crystal ball, but here is my best guess as to what is to come.

The markets are driven by fear and greed. I’m optimistic that the government will work out the trade war with China and that greed will return, allowing for hopefully another six to 24 months up in the market before the next recession hits.

Interestingly, historically when bubbles end, the last year of the bubble is often the most exciting as greed runs rampant and markets go much higher (think tech stocks in 1999).

Then, when greed is running rampant and everyone is invested the market, that’s often when the smart money gets out and the rug gets pulled out from everyone (i.e., the tech and real estate bubble bursts). It’s unfortunate but true that studies show the average person buys near the top of a market and sells near the bottom.

Having said that, I’m hopeful we have a good 2019. Just because I’m hopeful that the markets will continue up does that mean I’ll throw caution to the wind and gamble with my retired millionaire clients’ money by investing in all higher-risk stocks? No!

As a fiduciary, I must invest my clients’ retirement accounts based on the amount of risk that they want, which is generally a “Conservative” or “Moderately Conservative” amount of risk. They typically don’t want any of the three next higher levels of risk: “Moderate,” “Moderately Aggressive” and especially not an “Aggressive” amount of risk!

The reason that I won’t gamble with my clients’ money by taking aggressive amounts of risk is because I have to keep their individual risk tolerance in mind. If I’m wrong and we do have a recession in 2019, my clients never want to lose another 50% of their portfolio ever again!

The point of a recession is to work out excesses in the economy. The formation of bubbles encourages people to invest more in a particular sector of the economy, which causes excesses in that sector. The next recession then brings balance back into the economy (think of the late-1990s excessive telecommunication investments or the mid-2000s excessive real-estate based investments).

So, Whenever This Bubble Does Burst, Here Are My Predictions as to What’s Coming Next:

Prediction No. 1

First, the markets will go down again, possibly as much as 50% in the next recession.

Prediction No. 2

The next recession will probably be a rough recession, possibly worse than we’ve seen before. Consumer spending will almost certainly slow down considerably as people fear losing their jobs.

Prediction No. 3

I think during this next recession we will see deflation, which is when prices go down year after year. Inflation, the opposite, is when prices rise year by year. (I believe inflation is coming later, just not so soon — see below). Deflation will probably come as this credit-fueled bubble bursts and people spend less and borrow less.

Prediction No. 4

I think the Fed will use its tools to try to fight the recession just like they did during previous recessions, meaning they will probably lower interest rates again.

I believe that we may even see negative interest rates in the United States! Negative interest rates mean that, were you to put your money in a 10-year government bond, you might earn -0.5% interest per year. Indeed, 10 years later you would get slightly less than what you put in. Why would people buy negative interest rate bonds? Because they think that interest rates will go even lower, perhaps to -1% in the future … or even lower.

Sound impossible? In 2018, negative interest rates are happening in other countries around the world. ... In 2018, more than a dozen European countries had negative or 0% interest rates, including Germany, Switzerland, Denmark and France. Japan had negative interest rates as well. What’s more, the Fed even discussed the possibility of negative interest rates here in the United States as far back as 2016!

The Fed’s goal for using negative interest rates would be to encourage people to spend money instead of keeping it in banks. They want people to borrow more money — more mortgages, more corporate debt, more auto loans, etc. — and lower interest rates should encourage people to spend using debt, which is good for a debt-fueled bubble and our consumer-spending based economy.

Prediction No. 5

The other tool the Fed would probably use again would be more quantitative easing stimulus. Quantitative Easing programs include buying their own bonds and printing money to attempt to jump-start our economy and spur it on like back in 2009.

The problem is that each time the government does this stimulus, the new stimulus gets less and less effective. Therefore, they have to do more and more of it just to get the same result. It’s like a drug user building a tolerance: at first, a little drug gets you very, very high; it then takes more and more drugs to feel that high; until eventually, the drug just brings you back to normal because your system is used to it.

This is, unfortunately, where we find ourselves today after the U.S. was taken off the gold standard almost 50 years ago. Since that time, the U.S. was allowed to print as much money and accumulate as much debt as we wanted backed by “The Full Faith and Credit of the United States.”

Alas, you can’t spend your way to being wealthy like the government has been doing … at some point we’ll have to pay the piper. No one knows when our politicians’ reckless use of our funds will catch up with us. Hopefully it will be awhile, but no one knows for sure.

Prediction No. 6

So, after we make it through the recession, which might take a few years, things should get better for a while… but at some point we’ll be challenged by inflation again.

As a result of these concerns, at this point our retired millionaire clients are looking for strategies to preserve and protect their wealth and leave a legacy. I also suggest average investors follow their lead, assessing their ability to handle risk and making the adjustments necessary to batten down the hatches.

Investment advisory services offered only by duly registered individuals through AE Wealth Management, LLC (AEWM). AEWM and Stuart Estate Planning Wealth Advisors are not affiliated companies. Stuart Estate Planning Wealth Advisors is an independent financial services firm that creates retirement strategies using a variety of investment and insurance products. Neither the firm nor its representatives may give tax or legal advice. Investing involves risk, including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values. Any references to protection benefits or lifetime income generally refer to fixed insurance products, never securities or investment products. Insurance and annuity product guarantees are backed by the financial strength and claims-paying ability of the issuing insurance company. Any media logos and/or trademarks contained herein are the property of their respective owners and no endorsement by those owners of Craig Kirsner or Stuart Estate Planning Wealth Advisors is stated or implied. 700023