Where to Invest Your Money When the Stock Market is Overpriced

How do you tell if the stock market is too high? When do you sell? Or buy for that matter? Read this article to learn the right time to sell a stock. #wealthyaccountant #stocks #stockmarket #investing #investingtips #bonds #moneymarket Investing for beginners. Investing for wealth in your 20s or 30s. In or near retirement.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.)

Robert R. Prechter Jr. is another guru from a past age (my age). Prechter published The Elliott Wave Theorist in the 1980s.

When is the best time to sell the stock market? Selling an investment is just as important as how you buy the investment. And where do you put the money once you sell? #wealthyaccountant #investing #indexfunds #retirement #selling #money #cash

The only way to time the stock market. Don’t.

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.




Perspective

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.

When is the best time to buy a stock or index fund? Should you buy or sell at these levels? Inside are clear answers to investing your money in your 20s, 30s or any age. Beginners and experienced investors face the same question on when to sell and what to do with the proceeds. #wealthyaccountant #beginners #investing #tips #ideas #help #money #cash

Should you buy the stock market at these levels?

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.

Liquid Funds

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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Keith Taxguy

24 Comments

  1. Blake Bialkowski on September 20, 2018 at 8:17 am

    I look forward to your article on paying off the mortgage vs. investing, I struggle with this often. Thanks for your insights.

    • Keith Taxguy on September 20, 2018 at 8:18 am

      It’s in the queue, Blake. In the back of my mind I have it planned for Monday.

  2. Ashish on September 20, 2018 at 8:21 am

    Great timing Keith! With the whole media crying wolf these were the exact thoughts/ questions I have been having in my mind recently.

    I plan to stick to my investing strategy into Index funds however I have a bigger problem where I have a big percentage of my networth in my company’s stock. I have been thinking of selling a portion and buy a home or invest that money into index funds, haven’t been able to make up my mind yet.

    • Katy on September 20, 2018 at 9:29 am

      As someone who’s company stock is at about 10% of what it was when it was at its high I recommend diversifying where you can. I’m limited in my options until I’m 55 so all Company stock I think of about the same way I think of Social Security, something will probably be there but its not smart to count on.

      (Thankfully I’m getting in at the low but some of my coworkers are down 100s of thousands)

      • Keith Taxguy on September 20, 2018 at 9:39 am

        Diversification is so important, Katy. I hope all readers scroll down this far. It’s important.

        • Marty on October 4, 2018 at 7:43 pm

          Isn’t this interesting. Guess who said this about diversifying: “diversification is protection against ignorance. It makes little sense if you know what you are doing.” Yes, your icon, Warren Buffett.

    • Mohammed on September 20, 2018 at 11:18 pm

      I would buy a home over more index funds if you have the later and not the former.

      Sense of pride, inflation hedge, diversification.

      • Mohammed on September 20, 2018 at 11:20 pm

        … and don’t hold too much of your company stock.

  3. planedoc on September 20, 2018 at 8:56 am

    It’s tough to stay invested in a bear market. 2008 gave me some sleepless nights. I’m wondering if it’s tougher staying invested in a raging bull market, especially as it ages.

    I’ve predicted a market fall every year since 2014. Thankfully, I merely predicted the market fall, and didn’t act on my own prediction. Stayed invested, kept putting more money in, and have been rewarded for ignoring my gut instincts.

    I took out a large mortgage in 2016. Paid it off completely in early 2018. The math wasn’t favorable (either in advance, or retrospectively). However, when you don’t know the future (and we never do…) the prospect of facing a decline in value of my investments versus knowing that the mortgage wasn’t going to decline along with the market….led me to pay it off.

    The comfortable, sleep-filled nights were a great reward.

    (so, yes, I personally am in favor of paying off the mortgage rather than using it as leverage to invest….because of the “I don’t know the future” argument)

    • Keith Taxguy on September 20, 2018 at 9:36 am

      It’s tougher to stay invested in a bear market, Planedoc. The panic selling in every bear market boggles my mind. Like you, I’ve felt the market will have a serious fall any day now for years. The reality check is it doesn’t matter. Even terrible timing on a buy of a market-based index fund turns out good is short order.

      • planedoc on September 20, 2018 at 9:50 am

        Maybe my gastric mucosa has forgotten….but I didn’t sell anything in 2008….just kept putting in. I’ve marveled at the number of friends I’ve had who sold out in 2008….then waited until 2015 to get back in.

        Agree….it doesn’t matter.

        • Mohammed on September 20, 2018 at 11:25 pm

          I enjoy bear markets.

          The opportunity excites me. If one enjoys picking individual stocks, going for high beta stocks in a bear market can be rewarding, and intellectually stimulating. I’m waiting for a bear market to indulge my passion again.

          Index funds are by far a smarter choice in a bull market and the compounding effect is phenomenal on ones net worth.

  4. Marina on September 20, 2018 at 9:18 am

    What qualifies as a low enough mortgage rate to not pay off? We have 4.375% and may have been rushed into this with our mortgage broker (when congress was shutting down) since I’ve seen lower rates shortly after we locked ours in and over the years. Does this warrant paying it off or continuing to invest in the months ahead when the market will probably have a down turn?

    • Keith Taxguy on September 20, 2018 at 9:37 am

      I plan on publishing the mortgage vs. investing post Monday. As a teaser, my mortgage is 2.125% and I’m paying it off. You’ll find out why Monday.

  5. Alice on September 20, 2018 at 9:29 am

    Thanks for this–I’m going to bookmark it for the future!

  6. Mark on September 20, 2018 at 9:48 am

    Thanks for this great reminder Keith. Its so easy to fall into the temptation of trying to time the markets.

  7. Kenneth on September 20, 2018 at 10:57 am

    I’m retired. I agree – no bonds, too risky and I don’t have time to fool with laddered bonds. However, I keep 25% of my IRA in a money market fund yielding 1.89% currently. I rebalance once a year on my birthday, meaning I sell some of my stock holdings to replenish my money market holdings. UNLESS: my stock holdings are lower in value than the last time I rebalanced. In which case, I skip rebalancing that year, and will do so for up to six years, which 25% will cover at a 4.5 percent withdrawal rate. This should work, because in the last 80 years, the longest it has ever taken stocks to fully recover from a cycle low is 4.5 years. The Oct 9, 2007 high was crested on Apr 4, 2012 in the Wilshire 5000 index. Is the stock market high? I don’t know – and I’ve been following it for 50 years. Best to have a cash allocation for lean times, and invest the rest.

  8. Brian McMan on September 20, 2018 at 2:01 pm

    Hey there, thanks and stuff. Here’s my zero wage take on it.

    If you think the market is going to crash, and you’re worried about losing your J-O-B, then invest extra fund in things that will give you a seamless transition to the next job.

    You don’t have to pull money off the table, but I am glad to have repaired the brakes on the car back when I had the chance to. The nice clothes from Goodwill is going to help. Buying that Dryer from a yardsale is going to save me time over going to the laundrymat. ETC and so forth.

    Happy trails.

  9. Mohammed on September 20, 2018 at 5:26 pm

    I agree that investing in the market has historically returned higher than the next alternative, it compounds, and can be a great tool for portfolio diversification.

    No doubt.

    I can almost hear a bell ring.

  10. Sam on September 23, 2018 at 7:49 pm

    Maybe I missed it: which international index fund do you regularly invest in? Like you, I’m almost all SP500 and hold a portfolio of mostly equities and cash.

    • Keith Taxguy on September 23, 2018 at 9:33 pm

      VTIAX

  11. JL Collins on September 24, 2018 at 7:09 am

    Hi Keith…

    Excellent post and perspective!

    I, too, am old enough to remember Granville and Prechter and the like. Although, I had blissfully forgotten them until your reminder. 😉

    Since you were kind enough to link to my Stock Series, perhaps you’ll allow me to offer this link to my own take on investing in raging bulls: https://jlcollinsnh.com/2013/05/22/stocks-part-xviii-investing-in-a-raging-bull/

    It is worth noting, I wrote that post in 2013 in response to all those convinced the market was “due” to fall. Just as you wrote your post today. Which, BTW, I am adding as a link as an Addendum to mine. Thanks for saving me the effort of writing an update. 🙂

    To be clear, just as then, I have no idea what the market will do next. But you don’t deal with that by trying to time it. You deal with it using your asset allocation.

    • Keith Taxguy on September 24, 2018 at 7:50 am

      Long time, no see, Jim. It is good to hear from you again.

      You are 100% allowed (even encouraged) to provide a link. You’ve provided the Gold Standard when it comes to stock investing. Thanks for the return link. To all my kind readers: Jim’s Stock Series goes far deeper than I have here and is MUST reading. The fact that he touched the subject years ago and it proved the point, it is important to internalize the concept of long-term investing without any thought of timing.

      Thank you for stopping by, Jim. Hope my readers heed my advice and check out your work. They’ll be well rewarded if they do.

  12. […] stock market reflects these facts. In the U.S. the stock market has powered higher decade after decade. Even the Great Depression is a minor speed bump when the charts are viewed over large time periods. […]

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