The Stock Market Is at record highs, is it time to sell?
I help a lot of people with their financial planning especially
around the end of the year and the beginning of new one as it is a good time
for everyone to review their financial plans. Is it time to sell is perhaps the
most often asked question I get these days. I also hear a lot people that tell
me how they are getting out of the market because they are sure a major
correction or a crash is just around the corner. Unfortunately a lot of people also
told me that in December of 2018. Any of those who did not follow my advice lost
out on a 30-35% gain this year, one of the best years the market has had in a
long time.
Yes the Stock market is in the longest Bull Run in history.
Yes it seems to be hitting new all-time highs, and yes there will likely be a
significant downturn someday. The optimal word is “someday”. If you know when
that day is for certain, by all means cash out the day before it arrives.
However if you are not 100% certain of your stock market prediction abilities after
reading this post please stick with your
plan for long term investing. Stop
trying to guess at what the stock market will do on any day, week or even year.
In the long run you will do much better if you follow my favorite saying for
serious long term investors. It is not about timing the market it
is about the amount of time you spend in the market. Market timers
spend too much time out of the market, and seldom get their timing right. Over the long hall they never make up for
all the time they spend out of the market.
You can find plenty of articles telling you it is time to
get into or out of the market on any given day. You can certainly always find
at least one “expert” to support your position if you want to feel good about
timing the market. The thing is, no one knows what the market will do in any given
year. I read lots of articles and try to follow the market much closer than
most. I like to tell people that with all my research I have correctly picked eight out of the last four serious market
corrections. That is not a typo, yes I have picked the right year of some
market corrections, but I have also
predicted several corrections that never come about. Fortunately for me I usually stick to my plan and don’t act on
my predictions. I have done quite will sticking to the plan.
I am always amused by the articles that talk about the consensus
forecast for the market. They take the
averages of all the “experts” and not surprisingly the consensus is almost always
between 7 and 8 percent, which not coincidentally (I believe) is about the
average rate of return of the stock market over time. The consensus forecast is
almost always wrong, rarely does the Market return its true average return rate
in a single year let alone year over year. In 2018 the consensus was the market
would return between 7-8 percent, it lost about 8%. In 2019 the consensus was the market would
return between 7-8 percent, it returned 30%. In 2020 the consensus is the market
will return between 7-8 percent, what do I think it will actually return? I don’t
know but I’m pretty certain it won’t be 7 or 8 percent! You see the pattern
here? On the other hand, I am pretty
certain that if you average out the next
ten years you will average an annual return of between 7 and 8 percent. If
you missed last year, you will never get that back, learn your lesson and don’t double down assuming the drop must be
coming this year. You might be right, but you would still have to time the bottom
and get in at just the right time. What bottom will you be looking for if the
market climbs another 10% before it starts down? Will it go down enough to make
up the difference you just lost out on?
The point is, have a
plan, and stick to it. Decide how
much you want and can afford to put into the stock market and make sure you
have enough cash to get you through any down turns and you will be fine. If you don’t have to sell in a down market
you won’t lose anything. Most people that road out the last serious down
turn saw 50% paper losses or greater. They gained that all back in three years.
They now have more than 5 times the money at its lowest point and more than
three times the money before the fall off started, all because they did not
time the market.
There is study after study to show that people that try to time the market get out to soon and get back in too
late. It is the rare and lucky person that gets both the in and out exactly
right. Rely on the law of large numbers which show that the stock market consistently outperforms every other investment available
to you over the long run, even if it does it in a very zig zag unpredictable way in
the short term. If you are worried
about what your stock valuation will be next year you should not be in the stock
market no matter how good or bad you think the market will do in the next 12
months. If you are investing for the long term don’t worry what the investment
does next year worry about what the net result will be at the end of your long
term horizon.
I am sorry it has been awhile since I posted, a lot of
family stuff late last year, but I am going to try and post regularly this
year.
You can also follow me on Facebook or Twitter. I have also started a blog where I will post
these emails. Financial
Planning Truths. If you find this information useful please share it
with anyone you think would be interested and retweet it to your followers.
Comments
Post a Comment