Should I Sell Now???

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.

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Author: Ms. Liz

A CPA, I retired at 51 and I am helping people create their fantastic futures!

9 thoughts on “Should I Sell Now???”

  1. I’ve been looking at those VTSAX returns too thinking things are too good…and that always makes me nervous. But at 51, I tell myself the market can correct and recover before I hit 59 1/2. Fingers crossed!

  2. Not changing a thing! For now. We invest a fixed amount in VTSAX every month, and everything else that we can spare goes towards our mortgage. If the market starts to fall, I will make only required mortgage payments and start pumping it all into VTSAX. As and when we get hold of the money.

    I thought about international funds. And then decided that VTSAX was good enough. All those companies have huge international exposure. And if the US economy does down, everything will go down – even if not at the same level. I will take my chances. We still haven’t retired – we can keep working for a bit longer if we have to.

    1. BusyMom: consider international funds for two benefits. The one you mention is market diversification. Different country markets are often uncorrelated and you will benefit from the diversification into international funds with reduced risk and likely increased returns. Who could ask for more? But there is more. MsLiz mentions currency risk as a reason for adding some international funds. Many investors are greatly diversified, company-wise, through a fund like VTSAX, but have no currency diversification. Having all your eggs in the “dollar” basket has substantial risk when considering how badly the US government is in debt and also considering that there is the potential for the US dollar to have a reduced reserve currency status sometime in the next couple of decades. Holding 15% to 30% in international funds means that you have some of your holdings based in yen, yuan, euros, pounds, etc. As a DIY investor, consider this critical form of asset allocation . . .

  3. liz, i like your take on livable wages. since ’04 i’ve worked in this huge corporation factory with the workers represented by USW union. i’m a lab guy and at the top of that scale with the mechanics and electricians but the people on the factory floor make a very livable middle class wage. that changed some recently when the company won a 2 tier system in negotiations so the people hired in the past 6 months will make significantly less than a person next to them in tier 1 doing the exact same job. i’m really making 2 points: 1. you can retire early and get rich even at at a job like this with no college degree if you make the money work for you in investments. 2. part of this wage is for the lifestyle sacrifice of working nights and weekends for half your working life. it’s rough on a body. i know.

    i also know we all make these choices of how to get money from work. i would say that the walmart employee who looks at us and thinks we make way too much only thinks so because they make way too little. it’s a perspective thing.

    i stopped reinvesting my dividends for the whole portfolio in order to watch for what to buy on any pullbacks. i also started bulletproofing with recession resistant stocks that keep raising dividends looking for the dividend aristocrats of the next 20 years. all that blabber and i still haven’t sold my high flying growth stocks like nvidia, netflix, or shopify yet. so i’m tweaking very slowly…or was i twerking slowly? i forgot.

    1. Thanks for adding your perspective on living wages Freddy. Someone should study the social outcomes of paying significantly different wages for the same work on the same factory floor. It seems fraught with peril. It’s not realistic to live on less than you make when you make very little.

      Turning off dividend reinvestment is a great way to prepare a bit for a downturn. I’ve done this in my taxable accounts but not for that reason. It provides accessible funds with no tax consequences. So when I decided to prepay our property tax last December, I could do so without creating additional capital gains. It sounds like you’re making some smart moves while maintaining your market exposure.

      Thanks for stopping by and for your thoughtful comment!

  4. I think you are the smart one! Probably getting out now is statistically not a bad move but then you will be plagued for the rest of your life with the temptation to time the market, and the first test will be when to get back in. I really want to reduce exposure but I’m right where my brain told me I should be a year ago so I think I’m going to do what I’ve always done and let it ride. I didn’t sell a share in 2000 or 2008 and I’m not going to now. However the temptation is stronger now that I’m mostly retired.

    1. Steve, you know the way to this girl’s heart–just tell me I’m smart 🙂

      Mr. Ms. Liz and I could be study subjects for market timing. While he’s missed some of the severe drops in the market, I’ve come out well ahead by just staying in. One of the benefits of keeping our money separate is that we balance each other out on investment risk taking.

      I’ve wondered if it would be as easy to ride out a severe downturn now that I’m living on those investments. I’m hoping the 30% runup we’ve seen since I retired will help me stay put. Sounds like we’re having similar thoughts . . . fingers crossed that we’re not kicking ourselves.

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