The stock market is in nose bleed territory and doesn’t seem to want to stop climbing. Economic risks are everywhere. Debt levels are high, interest rates are climbing, a trade war is breaking out and the market valuations are at near record high levels. In times like these investors get scared. The bull market is long in the tooth and “due” for a serious correction. But then again, using a gambling term might not be the best choice when investing your money.
It is rare when a client doesn’t ask me where to invest their excess funds. Virtually every client wants to pull money from the market but doesn’t know where to put the proceeds. Lump-sum payments and accumulated cash in money market accounts cause concern when the stock market would have been a much better choice.
At these level we might ask, How much higher can this go? How much longer before disaster strikes? And then the market indexes keep marching higher.
Retirement makes it even worse. If your nest egg is enough for a comfortable retirement, but lacks excess, the market climb causes concerns. Nobody ever lost money taking a profit, goes the old Wall Street adage. But is it a smart idea to sell when the market is high considering it is almost always considered high? And if selling is the right choice, where do you put the money? We will explore those important questions today, before catastrophe strikes.
Are You High
There is an advantage to age. Once you’ve lived through a few market cycles you begin to realize the best choice is to stay calm. Newscasts will tell you the sky is falling. It isn’t.
In the 1970s and 80s Joseph E. Granville was the guy to listen to on stock investing. When Granville spoke the market moved. He had a system for timing the stock market and a knack for promotion. (He had books to sell.) The Pinterest placard in this post of his 1976 book is from my personal library. (I’ve been reading investing books for a very long time.)
Both Granville and Prechter were market timers; something we know is a bad idea when it comes to investing in the market. Warren Buffett doesn’t write books; he writes annual reports for his company. People write books about Warren Buffett. This opposed to market timers who write books on their system and sell it to the masses. See the difference. One makes money and people write about them. The others make their money selling you books on how they think you should invest. Think about that for a moment.
I bring up Granville and Prechter for a reason. These and others called for a serious market declines in the 80s. I remember watching the Nightly Business Report where a guest expressed with great confidence the Dow Jones Industrial Average would soon test the 1932 lows from the Great Depression because the Elliot Wave theory predicted it. People actually paid for that kind of advice!
When the Dow was under 1,000 it was overpriced. It was overpriced in 1932 then is bounced off the low 40s. (The DJIA closed at 41.22 on July 8, 1932; its all-time low.) You see, when the Dow was that low people had real reasons to believe the world was ending, at least economically. Even with the Industrials at 40 and change the market was high because these companies were losing money. Things were bad, really bad. And getting worse.
Then the Dow reached 10,000 and it was really high, overpriced and ready for a decline. Well, before the world actually ended the Dow notched 20,000. Of course it was painfully obvious the market had to decline. Just look at the political climate. How can it possible go higher?
Unfortunately we will have to wait for the permanent decline in the market. Yesterday (September 19, 2018) the Dow closed at 26,405.76. And you guessed it. Clients still want to know if they should sell their index funds and move to cash.
I provided plenty of links above to helpful sites on the issues I discussed. I didn’t link to Amazon for any of Granville’s or Prechter’s work. Granville actually published another book in 2010. I didn’t know that until I researched this article. It sounds like more market timing advice to me. And that is why I didn’t link to their work. I think it is terrible advice.
Let’s bring the current stock market into perspective. At the last cycle market high the DJIA was around 13,930 at the end of October, 2007. If you had the worst of all luck and invested a massive windfall (the lottery sent you a gazillion dollar check) at the exact peak you would be up just shy of 90%! (89.55% for home-gamers.) Index funds make it easy to match the market. An all-market or S&P 500 index fund would have yielded slightly different results, but still good gains all the same.
The lesson is learned. Even if today is the absolute worst day to invest, a decade down the road you still have pretty good odds it will still be a good call.
I’m not calling for the market to climb high, by the way. I might be crazy, but I ain’t dumb. I have no clue where the market is headed. Looks high to me and always does. So I bite my lip and keep invested, laughing all the way to the, ah, index fund.
The long game is always higher. Jim Collins has written extensively on the stock market and why it always goes up. Notice I didn’t say the market never goes down! The market does decline from time to time, but always climbs higher after the temporary pullbacks. The only time this will not happen is if civilization fails. If that is the case you have bigger problems than a stock market decline.
The information above doesn’t mean everyone should be fully invested! Those in or near retirement may need a few years of liquid cash in money market or bank accounts regardless the level of the stock market. Businesses also need working capital that is liquid. Money that has a five-year or longer horizon probably deserves to be in equities.
I intentionally left bonds off the list. Bond yields are low. Serious losses occur with long-dated bonds as interest rates climb. If rates stay low you still only get a meager return. I see no reason to consider bonds, except for pension funds, banks and insurance companies.
Alternatives to Index Funds
The S&P 500 and DJIA are up over 300% from the lows a decade ago. It is understandable some people have the jitters. Panic selling is the worst of all choices. If a market decline causes you to lose sleep it might be time to take a few chips off the table.
If you receive a bonus or other windfall it still makes sense to drop the lump-sum into a broad-based index fund and live with the results. The evidence is clear this is the correct choice. You might be unlucky and pick the worst day of the decade. Odds are you will not. But if you do you still have an excellent chance to enjoy nice returns in a relatively short period of time.
If your temperament doesn’t handle the market well at these levels there are options. First, pay off debt. You can’t lose retiring liabilities. The car and credit cards must be paid in full. The mortgage is always a tough call. (Stay tuned for an upcoming post on paying off a low interest rate mortgage versus keeping the mortgage and investing the funds for a higher return.) I feel paying off the mortgage makes sense for most people. “Safe” investments don’t pay as much which makes them less safe than perceived.
Once all debt is eliminated you still need to invest liquid funds. There are few good choices at this time. Capital One 360 and Discover Savings offer competitive interest rates, but they are still low comparatively. Vanguard’s money market fund is another alternative worth considering.
The Best Investment
I know how hard it is, kind readers, but a broad-based index fund is the best choice for money with an investment horizon of 5 years or longer. The market is high. It’s always high. The best time to invest has always been now.
Granville and Prechter convinced a generation they could time the market. Nobody does it consistently. The surest path to financial success is to tie yourself to the economic engine of virtually the entire economy. As the economy grows, so do you.
The best and only advice is to stay fully invested all the time without leverage (using borrowed money to buy the investment). The exception is working capital for businesses and liquid funds for household expenses of a few years, a bit more if retired or nearing retirement.
Close your eyes if it helps. Bear markets tend to end quickly.
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