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READY FOR RISK? With market soaring, tapping IRA is tempting




Investors with IRAs and 401(k)s may have dreams of taking a cruise or buying a new car with the gains they have seen in their retirement accounts since Donald Trump was elected president. The Dow Jones Industrial Average reached a record high of 20,000 in late January, and since then has continued to climb reaching 20,686 by March 30. But there are concerns about that much growth in a short period of time. Are we looking at a stock market bubble? As one analyst put it, the stock market could be “cruising for a bruising.”

People who have reached the age to be able to withdraw from retirement savings without tax penalties might be tempted to sell some of their retirement savings while the market is so high. And the rally might have people of all ages wanting to take a look at their asset mix with an eye to moving some savings to safety.

Stacey L. Wall, CEO of Pinnacle Trust, said there is no easy answer about how to react to the gains in the stock market.

“It depends on several factors: age, risk tolerance, how long before you retire, and how big a percentage of your net worth is in your IRA and/or 401(k),” Wall said. “For example, my son is 23 years old, has a long time before retirement, and hasn’t accumulated a lot in his IRA and 401(k). So my advice to him would be to stay the course with an all equity strategy and don’t worry.”

On the other extreme, if you are 63, thinking of retiring in the next couple of years and don’t need to take much risk, Wall would advise dialing back the risk with stocks at current levels.

“As I said in a recent blog, it’s not that we’re worried about another crash as in 2008-09,” Wall said. “But we don’t see a lot of upside with stocks at current levels and a 20 percent correction is certainly a possibility. Investors need to be patient and understand that there are times when the stock market gives us opportunities to make a lot and there are times when it’s more important to hang on to what you have made. We think we’re in the latter right now.”

Wall said they do not see a significant bubble like the country experienced in 2008.

“We don’t see a recession on the horizon,” Wall said. “Growth may increase some with President Trump’s initiatives, but it will be hard to increase growth a lot with all of the debt in our economy and the global economy.”

Wall said the S&P’s gains of more than 10 percent since the election of Trump adds momentum to a bull market that is already 8 years old.

“Since the current bull market began in 2009, stocks are up a whopping 17 percent per year, 70 percent more than the long-term average of about 10 percent per year,” Wall said. “But Bloomberg reports that the average price-earnings ratio for stocks in the S&P 500 is 18.3, based on consensus estimates of 2017 earnings.  That’s near the high end of the historical track record.  Fran Kinniry of Vanguard believes that valuation explains about 40 percent of returns; the other 60 percent is unexplained. Therefore, Vanguard prefers to think of probable ranges of outcomes. Kinniry says there is about a 25 percent chance that stocks will deliver double-digit returns over the next decade. There is the same chance of an average return of 3 percent or less, and a 50 percent or so chance for stocks to average somewhere in between.”

Ashby Foote, chief investment officer, Vector Money Management, said there are reasons for optimism in a number of areas.

“For one, the consumer confidence number that came out Tuesday, March 28th, was a big upside surprise that is now at the highest level since the year 2000,” Foote said. “Part of that is efforts by the new administration to pare back through executive orders on regulations that constrained hiring and business activity. In addition, the prospect for lower corporate tax rates is a big plus for investors. It is important to realize that the stock market values companies by discounting future after tax earnings. Other things being equal, if you cut corporate tax rates, it follows that after tax earnings will increase – thus the prospect for higher stock valuations.”

Foote said there are always some stocks that are overvalued, but if the new administration gets its infrastructure and tax reform passed, it is reasonable to conclude that there are plenty of stocks today that are very reasonable priced.

For conservative investors, Foote would not recommend bonds in today’s current interest rate environment. Rather he would suggest blue chip, dividend-paying stocks.


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