Making Money Alert: The Market’s at New Highs, So What Could Possibly Go Wrong?

The bulls are screaming, and during the past week we’ve seen the S&P 500 Index surge to its highest point in more than five years. In fact, the last time the broad measure of the domestic equity market was at this elevated level was back in 2008. Of course, we all know what a great year that was for stocks, don’t we?

I am being tongue in cheek here, of course, as 2008 actually was one of the worst years ever for equities. Now, I am not saying that 2013 will be a repeat of 2008. But in 2008, as is the case today, investors were largely of the opinion that nothing possibly could go wrong, and that stocks were headed up, up, up.

I remember that time as a period of high complacency, and one characterized by blind optimism about the markets, the global economy, the housing market, etc. The result of this optimism was that investors failed to protect themselves from a pernicious fall in stocks. Moreover, many investors were way too allocated to momentum stocks. Because of that, many investors have yet to begin to get back to where they were in 2008.

Unfortunately, the same sentiment back in 2008 is out there today.

According to a recent Bloomberg survey, investors are the most bullish on stocks in at least 3 1/2 years, with close to two-thirds planning to raise their holdings of equities during the next six months.

The Bloomberg Global Poll also showed that 53% of respondents say equities will offer the highest return in the next year. That figure represents a 17 percentage point jump from the last poll in November. It’s also the highest metric since Bloomberg began the quarterly survey of investors, analysts and traders in July 2009.

So, what’s behind all of the enthusiasm for stocks? The survey cites growing confidence in the U.S. economy and a reduction in concern over Europe’s ailing financial situation. According to respondents, America is in its best shape it’s been in for two years, and Europe has essentially righted its 2012 tailspin.

All of this optimism translates into a serious case of complacence, and one that I fear really could hurt those who are not prepared to cope with a market downturn.

It is during times when investors harbor unbridled bullish enthusiasm that, seemingly out of nowhere, an exogenous event pops up to slap investors back into recognizing the error of their ways.

So, what kind of exogenous events can take this market down?

Certainly there are the political machinations in Washington about spending cuts, and particularly over the debt ceiling. Earlier today, the House of Representatives voted to extend the debt-ceiling limit for three months, provided the Senate passes a budget. We’ll see what happens here. But to me, this situation seems like more of the same “kicking the can down the road” that has led us to so many uncomfortable, and market damaging, political battles.

Then there’s the unknown still lurking over Europe, and that region’s troublesome bailout issues. If we get more tumult in that region in the months ahead, it could very well be another flight-to-safety event in the market similar to what we saw in mid-year 2012.

For now, however, the market continues to trade with blinders on, and that situation means stocks keep getting bid up — until they don’t.

Fiscally Fit for the New Year, Part III

For the past couple of weeks, we’ve outlined some of the steps needed to become fiscally fit in 2013. This week, we have Part III of our series, which will be of particular interest to investors with a focus on income. Recall that the first installment was all about taking an inventory of all of your assets. Part II was to do an asset allocation review. Today in Part III, it’s time to think about cash flow.

In my experience, most people don’t think about their income as much as they do their expenses; however, the beginning of a new year is a great time to look at all of your existing — and potential — income streams. Now, this exercise is extremely important if you’re in retirement or transitioning into retirement, but it’s also very important if you’re still working.

Remember that your goal when investing is to increase your net worth. You can boost your net worth by making good investment decisions, but you also can accomplish this goal by saving more money. The bottom line here is income minus expenses. We will get to the expenses portion of this equation next week, but this week’s focus is on income.

Income is something that can, and should, come from multiple sources. When you finally reach retirement, you’ll want multiple income streams. Here are the categories of income for most people who are currently working:

• W-2 income (wages earned and taxes withheld)
• 1099 income
• Rental income
• Investment income (interest and dividends from your taxable portfolio)
• Royalty income (alternative income funds such as master limited partnerships, real estate investment trusts, etc.)
• Business ownership (profits from a small business or side business)
• Alimony/child support

For retirees, the categories for income streams also include:

• Social Security
• Pensions
• IRAs (required minimum distributions or withdrawals from retirement accounts)
• Other retirement plan distributions

This week, I want you to calculate all of your current (and projected) income, and figure out what’s coming in monthly and annually. Your goal here is to add up your total income, as you want to know how much cash flow you’re expecting this year. Completing this exercise is critical to determining the kind of net income you’re going to have in 2013. Knowing what you have coming in is the first step in increasing your net worth, so be sure to complete this exercise before next week.

If you’d like to gain more guidance, as well as my take on all of the latest market action, then I invite you to sign up here for my weekly audio podcast.

Excellence is a Habit

“We are what we repeatedly do. Excellence, then, is not an act, but a habit.”

–Aristotle

Arguably the greatest of all philosophers, Aristotle also was one of the first motivational gurus. In the quote here, he extols the virtue of excellence, and the necessity of making such behavior part of one’s action. I think this lesson in wisdom is one that behooves all of us to learn.

Wisdom about money, investing and life can be found anywhere. If you have a good quote you’d like me to share with your fellow Making Money Alert readers, send it to me, along with any comments, questions and suggestions you have about my audio podcast, newsletters, seminars or anything else. Click here to ask Doug.