January 2nd, 2017 I published an article titled The Stock Market Seems Really High . . . Should I Sell?
It’s gone up 18.5% since then including dividends. Since I have 6% built into my long-term plan, I’ve seen three years of returns in the last year. And that doesn’t count January of this year–I’m up another 5% just this month.
Should I have sold? Clearly No.
Should I sell now? Who knows.
I’m not selling. I always stick to my plan–even in the terrible downturn in the great recession, I’ve always stuck to my plan.
The reasons the market seemed really high a year ago have worsened.
The Price/Earnings ratio is pushing 27 where the historical mean is closer to 16. This compares the price of a stock to it’s most recent 12 months earnings.
The Schiller Price/Earnings (aka CAPE Ratio) ratio is pushing 35 where the historical mean is closer to 17. This compares the price of a stock to it’s most recent 10 years earnings. There’s only one other time this indicator has been higher.
And I’m sitting tight. It feels a bit scary, but not as scary as you might think.
Here’s what takes the scary out of this stock market for me:
First, and most importantly, my expenses are low enough I can continue my current lifestyle even if the market drops 35%. And if it’s even worse, I have fallback plans for my fallback plans.
Second, we’re seeing the impact of tax reform–corporate tax rates went from 35% to 21%. This one change boosts corporate income 21.5%. When a corporation made a dollar pretax in 2017, they kept 65 cents; now with a dollar pretax income, they’ll keep 79 cents. That 14 cent difference represents 21.5% more earnings. That’s huge.
Third, corporations are using tax reform as an excuse to increase wages. And I say hallelujah. The disparity in the opportunities for the working class and the investing class is concerning to me. I believe we all benefit from working class folks earning a livable wage. And we all benefit as these wage increases are immediately turned into spending which increase corporate earnings and the cycle repeats.
Fourth, there are few good alternatives to stock market investing. Interest rates paid on bonds and cd’s remain at historic lows. The historic means for the P/E and Cape ratios referenced above, reflect times when these rates were much higher.
But here’s the real reason I’m not getting out of the market:
I’m not smart enough to know when it’s time to get back in. I’d dare to suggest you aren’t either.
So we sell today and the market continues to rise. Do we decide we were wrong and jump back in a rising market?
So we sell today, and are geniuses–our timing is spot on perfect. The market tanks tomorrow–it drops 10%, do we get back in? How about when it drops 20%? . . .
And in the meantime, our money is earning 2% if we’re lucky, we’re probably not even keeping up with inflation.
OK I’m not selling but I did do one little tweak.
My careful readers know I’m a huge fan of VTSAX–Vanguard’s Total Stock Market Index Fund. With the exception of some legacy investments that would create a large tax bill if I sold, everything was in VTSAX.
But earlier this month I moved about 15% of my invested assets to VTIAX which is Vanguard’s Total International Stock Index Fund. With our stock market so frothy, I thought it made sense to have a bit of international exposure. Especially since the value of our dollar is declining against foreign currencies.
So that’s it, I’m staying on track but with a little tweak. How about you?? Are you making any changes to your investments?
Investing is risky, this reflects my opinion and is for entertainment purposes only. Proceed with caution, do your research and seek professional advice if necessary.
Photo credit Ms. Liz from our back deck.