Election night it looked like the stock market was going to tank. S&P 500 futures were down about 15%. I was scared for my country and my money. I was preparing to write an article celebrating that stocks were on sale and telling everyone to stay the course or to buy. Rather than crashing, we saw the S&P 500 go up over 1% the day after the election and it has only continued to rise since then. This is a very different article but the answer remains the same.
This post-election stock run up has been amazing. Through Christmas weekend, we hit all time highs. My invested assets grew over 3% in November and an additional 2% so far in December–the annualized return is over 30%. I made more these months than I’m likely to spend in all of 2017.
Price to earnings ratios are very high. This ratio compares how much a stock costs to the earnings companies reported over the previous 12 months. We’re paying almost $26 for $1 of earnings for S&P 500 index funds. The historic average is under $16.
So the market looks expensive. Does that mean this would be a good time to sell and wait for a dip in the market to buy back in?
Perfect world–hell yeah! Let’s sell when the market is high and then buy back when the market is low. This investing thing is so easy!
Real world–wait a minute! Even though the current market looks expensive, it could still go up a lot. If I sold now, I’d miss that future growth. And how would I know when it is time to buy back in?
Have you ever tried to catch a falling knife? It’s not easy–I’ve never been able to do it. The same is true for buying back in a falling market. To buy something today and see the value of it drop tomorrow is really difficult. Humans are wired to avoid pain and would rather miss out on gains than risk losses.
If you are going to time the market, you have to be right twice–when to sell and when to buy. There is no way to know when it is time to do either.
If I sold today, I might end up being on the sidelines watching the market go up without me. And as I’ve said before, I subscribe to the theory that over the long-term, the market always goes up.
I can’t support this highfalutin lifestyle without being invested in the stock market–returns on bonds and bank accounts won’t sustain me for the next 40 years.
So I need to stay the course–and so should you.
Investing is risky, this reflects my opinion and is for informational purposes only. Proceed with caution, do your research and seek professional advice if necessary.