Huge Investing Error

Two of last week’s Wall Street Journal articles revealed how many investors are making a huge mistake.

The first article “This Market Really Is Different This Time” tells how small investors are moving away from the overheated US stock-market.

The article says:  The market has hit Dow 22000 not because of the individual investors Wall Street calls “the dumb money” but in spite of them.

Over the past month, small investors have pulled $17 billion out of U.S. stock mutual funds and exchange-traded funds and added $29 billion to bond funds. That’s the latest leg of a long-term trend: Since the internet-stock bubble burst in 2000, investors have withdrawn half a trillion dollars from U.S. stock mutual funds.

That’s smart, but guess what…

Small investors are jumping out of the frying pan into the fire, because their exodus comes from rebalancing.  As Americans reach retirement age, they shift from stocks to bonds.

There is a flaw in this massive trend.

Investors “rebalance” using pre-set proportions of stocks and bonds.  If  the proportion, for example, is 50% in stocks and 50% in bonds, when stocks go up their value becomes more than the value of bonds in the portfolio.  The investor automatically sells stocks and buys bonds to get back to 50% stock and 50% bond values..

It is reckoned that trillions are managed this way, to automatically scale back stock holdings as investors age and the US stock market rises.

The big mistake is that the US dollar shares sold are invested in a weak and dangerous bonds and a weak and dangerous US dollar.

The math is simple and reveals a huge error.

Bonds pay lousy returns at this time.

A Wall Street Journal article about the basic weakness of the US dollar (2) explains why the dollar will slide more.

This article says: Currency’s slide since January has near-term upsides for manufacturers, multinationals and the Fed.

The U.S. currency has been in a steady decline since January after reaching a 15-year high.  The WSJ Dollar Index, which measures the dollar against the currencies of major trading partners, is down about 8% since the beginning of the year, including a more than 2% drop over the past month. Its decline has been especially pronounced against the euro, 15%, and the Mexican peso, 28%.

It makes U.S. exports cheaper overseas, and thus helps to drive production at home.  In June, exports were up 7% from a year earlier.  That’s a sharp reversal compared with the 9% drop from 2014 to 2016, when the dollar was climbing rapidly.

This article points out that the current federal administration likes a dollar that’s not too strong.

Hold on just a second…

Why do they want a weak dollar?   Softening of the greenback makes the politicians look good. US exports become cheaper.  This helps American manufacturing, mainly the top executives and big investors who are not investing in low yielding bonds.

What’s the catch?

Those same weak dollars can ruin your and my purchasing power in two ways.   First, bonds pay lousy yields.   Second, everything we buy from abroad costs more… in US dollar terms.  Our German and Japanese cars,  Canadian lumber, Mexican tomatoes and Chilean grapes and every other darn thing we have become reliant on that is grown or made outside the USA.  This creates increased costs for US business and hinders the entire economic system in the US.

wall street journal

Chart from the Wall Street Journal article on the crash of the US dollar.


(1) This market really is different this time

(2) Dollar weakness article


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