To those we serve,
The U.S. stock market has recently closed at record highs (Reuters). While this is encouraging, history shows that record levels can sometimes mask future risks. One of Wall Street’s most respected strategists, Bob Farrell, spent decades at Merrill Lynch distilling lessons from cycles of booms and busts. His 10 Rules of Investing remain as relevant as ever — and they provide a helpful framework for today’s environment.
Bob Farrell’s 10 Market Rules
- Markets tend to return to the mean over time.
- Excesses in one direction will lead to an opposite excess in the other direction.
- There are no new eras — excesses are never permanent.
- Exponential rapidly rising or falling markets usually go further than you think, but they do not correct by going sideways.
- The public buys the most at the top and the least at the bottom.
- Fear and greed are stronger than long-term resolve.
- Markets are strongest when they are broad, and weakest when they narrow to a handful of blue-chip names.
- Bear markets have three stages — sharp down, reflexive rebound, and a drawn-out fundamental downtrend.
- When all the experts and forecasts agree, something else is going to happen.
- Bull markets are more fun than bear markets.
Today’s Market Through Farrell’s Lens
- Rule 1: The Shiller CAPE ratio is near 39 (GuruFocus), the Buffett Indicator is about 215% of GDP (Current Market Valuation), and the S&P 500 is ~2.1σ above its trend (Current Market Valuation). Historically, such levels have preceded 0–3% real returns over the next decade.
- Rule 3: Narratives about AI and “new productivity eras” mirror past bubbles — from the Nifty Fifty to the dot-com boom — where excess valuations eventually corrected.
- Rule 7: Today’s strength is concentrated in a handful of mega-cap names, echoing periods before prior downturns.
- Rule 9: Consensus is optimistic about rate cuts and a soft landing. Farrell reminds us that when everyone agrees, surprises often follow.
How We Are Managing Portfolios
- Equities: U.S. exposure kept disciplined; diversified into international markets and tilted toward value, quality, and dividend strategies (via individual securities and ETFs).
- Hard Assets: Allocations to gold ETFs and REIT ETFs for diversification and inflation protection.
- Bonds: Favoring intermediate maturities (3–7 years) and rolling short-term T-Bills to balance yield and flexibility.
- Cash: Money market yields were ~5.3% one year ago (BondSavvy), ~4.0–4.3% today (Schwab Asset Management), and may fall toward ~3% by end-2026 if the Fed cuts as projected (BondSavvy – Fed Dot Plot). We are balancing cash with short- and intermediate-term bonds to sustain income.
Key Takeaways for You
- Record highs don’t guarantee future returns. Valuations point to muted long-term outcomes.
- Cash yields will fall. Money market rates are already slipping and will likely decline further with Fed cuts.
- Diversification is in place. Your account is positioned across styles, geographies, bonds, and real assets.
- We’re acting, not waiting. Adjustments are being taken proactively within your portfolio.
Closing
Bob Farrell’s 10 Rules remind us that markets are cyclical, excesses eventually correct, and investor psychology often swings too far. At record highs, the temptation is to celebrate without caution. Our role is to manage portfolios for the long game with discipline, diversification, and foresight — so you can stay confident through both bull markets and inevitable corrections.
As always, we’re here for you. Please reach out anytime with questions about this update or your personal situation.
Warmest regards,