With another fund manager warning shares are vulnerable to a stock market correction, heed these famous words from Warren Buffett


What’s the big deal?

In an interview with the AFR, James Swanson of US mutual fund giant MFS Investment Management says evidence is mounting we’re entering the latter stages of the current business cycle, “thereby making¬†stocks vulnerable to a sharp correction when it does end.”

According to the article, he pointed to four signals that have put him on higher alert.

  1. Many smaller US companies are loss making.
  2. Margin lending in the US has run up to levels not seen since 1928. Billions of dollars were lost in the October 1929 stock market crash, the market’s fall exacerbated by margin calls.
  3. Many investment industry professionals have not lived through the business cycle, leaving them potentially ill-equiped to respond when it eventually does turn.
  4. There are signs the global economy is weakening, with manufacturing indices in France and Germany turning down. Although Mr Swanson says the US economy is currently booming, Mr Swanson says the tightening of interest rates by the Federal Reserve is already having an adverse effect.

What does this mean?

Add Mr Swanson to the list of people predicting some sort of correction or even a full blown stock market crash.

Because it’s impossible to predict if and when shares will correct, more concerning is Mr Swanson saying from these elevated levels, history suggests US investors should expect annual returns of about 3 to 4 per cent over the next decade.

What should you do?

I’m on record many times as saying investors should expect mediocre returns from the popular ASX blue chip stocks in the years ahead.

Bank shares are facing headwinds on multiple fronts. This is reflected in the 12.5 per cent fall in the Commonwealth Bank of Australia (ASX:CBA) share price so far in 2018.

Telstra (ASX:TLS) shares have problems of their own, including increased competition from Optus, Vodafone and TPG Telecom (ASX:TPM). The Telstra share price has also lost 12.5 per cent year to date in 2018.

Woolworths (ASX:WOW) shares are expensive for a company that is growing slowly and one that now pays only a modest dividend.

Diversify into growth shares and small cap shares. Find out the names here of 3 cheap and good ASX stocks to buy for 2018 and beyond.

Run a healthy cash balance, something that protects you on the downside and also gives you the firepower to buy shares if and when the share market sells off and some of your favourite shares become cheap.

Finally, don’t invest with borrowed money. As Warren Buffett has said…

“I’ve seen more people fail because of liquor and leverage — leverage being borrowed money. You really don’t need leverage in this world much. If you’re smart you’re going to make a lot of money (in the stock market) without borrowing.”

Contributors to this article may own shares in some of the companies mentioned in this article. The Capital Club has a thorough disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.
Bruce Jackson has 30 years of hands on investing experience. He is passionate about stock market investing, running his own portfolio and SMSF. His focus is on small cap growth stocks. You can contact Bruce at brucej@thecapitalclub.com.au