The following is a guest post by Chris Cagle from Retirement Stewardship.
If you read the financial press or investing blogs these days, you are sure to see an article about how the stock market has risen to record highs. Many are sounding the alarm that the market has reached such rarified heights that a major correction or crash is imminent.
A few are expressing concern that we are in a stock market “bubble,” which is a subject of some disagreement among those who closely track such things. There are analysts who say that although the market has hit record highs, it is far from “bubble” territory. Others who look at various price-to-earnings ratios as predictors of things to come are more concerned.
So the big question is, "Where will it go from here? Are we headed for a major correction or even a crash? Or perhaps we are heading toward heights we have never even dreamed of?"
The certainty of uncertainty
Most people get spooked about big market declines. About a year ago, I wrote about stock market volatility and what to do about it. At one point, the markets were down almost 10 percent from the start of 2016. I expressed my usual sentiment of “don’t just do something, sit there” as I generally hold to the premise that if you have a diversified portfolio that accurately reflects your risk tolerance, you will be well positioned to weather most any storm that comes along.
But the current situation is different. Although it seems counterintuitive, some people are getting a little nervous about the dramatic rise in the markets. And they’re certainly wondering how long it can continue.
Well, there's only one thing we know for sure: We can’t know for sure. But we do know that markets are cyclical; they never go in the same direction forever. So, it's with a high degree of confidence that we can assume that they will, eventually, go down. When and by how much is anybody's guess.
In fact, some historical declines, if not unforeseen, have been unprecedented. The 2008 crash was one of them – it was more than any other decline since 1929. But things were very different in 2008 than they are in 2017. Plunging real estate prices and collapsing credit markets were the main causes of the 2008 market crash.
But does that mean that a major correction or even a crash is any less possible? Not necessarily as it would be fantasy (and therefore pretty foolish) to assume that the stock market trends of the last nine years will go on without end. Does that mean that you should sell all the stocks in your retirement portfolio? Probably not, but taking some profits off the table to "keep some powder dry" for the next big buying opportunity might not be a bad idea.
Straying from the herd
I recently went against my usual “buy and hold” philosophy and sold about 15 percent of my shares in my large value domestic stock dividend fund to add to my cash reserves. Although it is a somewhat conservative fund, it is up over 60 percent in the last five years. In doing so, I raised my cash position to almost 30% of my portfolio, which is higher than its been in a long time.
Of course, I could just sit still and do nothing, which is what I do most of the time. And I suppose that some would say that this is really just trying to time the market. There may be some truth to that, but I am very aware of the many risks that folks like me who are getting close to retirement face, especially “sequence of returns risk.” Therefore, I am scaling back my stock allocation just a bit. I am also giving myself a little flexibility to buy more shares of a fund I really like when the right time comes.
I will admit that I am diverging somewhat from my own investing principles. As I wrote in an article about saving and investing,
Some people’s strategy for investing is to “play the markets.” They buy and sell and try to time market ups and downs in order to make a profit. Although there is the occasional success story, this has been proven to be a losing strategy in the vast majority of cases.
The fact is I do not “play the markets,” and I have only “sold high in order to buy low” a few times. I don’t think I can time the markets, so I am content to sit patiently and wait to put some of my cash back to work.
Straying can be scary
I will confess that I found selling some shares when things seem to be going so well felt a little uncomfortable, especially as I watched the fund that I had sold go even higher in the days since.
But reassuringly, Carl Richards, in a recent article titled, Sticking with the Herd: A Risky Proposition, reminds us that it could actually be the most dangerous just when it feels the safest to keep running with the heard. He wrote,
“…maybe we should think very carefully about doing the same thing as everyone else. Does it really keep us safer to stick with the herd, or are we risking everything by continuing to look at the world through an outdated lens?
He goes on to remind us of Warren Buffet’s advice to be greedy when others are fearful and fearful when others are greedy. Interestingly, the Fear and Greed Index is currently at 83, which is in the “extreme greed” territory -- the highest category. For me, it just seemed like a good time to apply Mr. Buffet’s advice.
Richards himself acknowledged that it can make you feel “wildly uncomfortable” when you separate yourself from the herd. That’s because we lose the perceived safety what we feel when we run with the pack. It did feel “funny” to sell even a few shares when everything seems to be on a steady march upward. But, as he also wrote,
“…then the market adjusts, and suddenly all the people who chase each other into it are chasing each other back out. Suddenly, sticking out doesn't seem like such a bad idea.
Straying, but not too far
It is important to note that I am not talking about gloom and doom here. I only sold some shares of two of my favorite funds to raise some additional cash; I didn't liquidate my entire portfolio and plow it into my gold ETF (GLD), which I maintain only a small allocation to (although I did add a little to it).
Simply based on current valuations, and the duration of the current market bull run, I don't think this was a bad idea. In fact, some would say that this is a good time to have 15, 20, or even 30 percent in cash for the next buying opportunity. When it may come is anybody's guess - I'm certainly not going to try. It may be a week, a month, a year, or longer. But it will come.
How do I know? Well, they always do.