Stocks Are At A Peak, Is It Time For You To Sell?

S&P 500
August 31, 1976 to December 13, 2016

 

U.S. stocks are at an all-time high.  With Donald Trump heading for the White House, we’re facing unpredictable times. Oh my goodness, just have a look at that chart. 

Since August 1976, the S&P 500 has gained 6,400 percent. You might consider selling.  But hear me out first.

I started to invest at a market peak.  It was 1989.  The S&P 500 had never been higher.  It had gained more than 30 percent that year.

If I had known that, I might have done something foolish.  Forecasters said stocks might jitter when U.S. troops invaded Panama. 

It was an unpredictable time. They said the same thing when the U.S. shot down two Libyan fighters over the Mediterranean Sea. 

It was an unpredictable time. Nobody told me that the massacre at The Tiananmen Square might hurt my portfolio. It was an unpredictable time. 

But no point in history has ever been predictable.

Stocks will crash.  Bonds will fall.  Stocks will rise.  Bonds will soar.  That’s what markets do.

Many pull out of the markets when fear and greed trip them up. 

Some sell after a strong market run or an Armageddon fear.

Others sell after a market dip.

But when it comes to investing, just cover your eyes and ears.  Someone investing $10,000 a year into an S&P 500 index fund from January 1989 to November 30, 2016 would have grown that money to $1.38 million–if they ignored market headlines.

I invested $3,000 in 1989.  I was nineteen.  I added money every month. I still do that today.

In 1991, stocks hit another all-time high.  In 1992, they went even higher.  In the 28 years that I’ve been investing, the S&P 500, including dividends, has hit all-time highs during 17 different calendar years. 

Y2K was an unpredictable time.  The financial crisis was an unpredictable time. 

Every year, in between, was an unpredictable time.  Memories are short.  Every year, somebody forecasts stock or bond market terror.  I wish you could see those headlines.

I’m now 46 years old.  Since 1970, U.S. stocks have hit all-time highs during 29 calendar years. 

But don’t worry about market peaks.  Even more important, don’t jump out of the market (or fail to get in) if you expect stocks to fall. 

Speculation will kick your butt.

Between 1963 and 1993 the stock market was open during 7,802 days.  University of Michigan Professor H. Nejat Seyhun found that during that period, 95 percent of the stock market’s gains came from just 90 of those 7,802 days.

That was pretty normal. The S&P 500 averaged 9.85 percent per year between January 1995 and December 31, 2014.  That would have turned $10,000 into $65,475. 

Investors who missed the best five stock market days would have averaged just 7.62 percent per year.  Instead of seeing their money grow to $65,475, they would have ended up with $43,435.

By missing the best 20 days, this money would have grown to just $20,360.  Investors unlucky enough to be out of the markets for the best 40 days would have lost money.  Their initial $10,000 would have shrunk to $9,143.

Could you hire someone to help you predict the best and worst days? 

Warren Buffett says no.  He says market forecasters exist to make fortune tellers look good.

A study by CXO Advisory echoes that as well. They collected 6,582 expert stock market forecasts for U.S. stocks between 2005 and 2012.  On average, a Golden Retriever might have beaten them.

Instead of speculating, investors should maintain a diversified portfolio of low cost index funds.  

It will rise.  It will fall.  But over your lifetime, the portfolio should excel if you can keep it invested.

And if you’re working, keep adding money. 





Andrew Hallam

I’m a financial columnist for Canada’s national paper, The Globe and Mail, as well as for AssetBuilder, a financial service firm based in Texas. I’m also the author of Millionaire Teacher: The Nine Rules of Wealth You Should Have Learned in School (2nd Ed. Wiley 2017) and The Global Expatriate’s Guide To Investing: From Millionaire Teacher to Millionaire Expat (Wiley 2015). My mission is to educate, motivate and inspire people on basic retirement planning and best practices for investing, using evidence-based strategies. I’m happy to comment on your questions. However, please read the Terms of Use, Privacy Policy and the Comments Policy.

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9 Responses

  1. Zori says:

    Nice article, thanks! What percentage allocation would you recommend for EIMI, IWDA, IUGA portfolio for 35 years old?

    • Zori,

      Asset allocation depends on many things: your risk tolerance, your other assets, the country that you plan to retire in. Have you read either of my books? If not, see if you can borrow one.

      Cheers,
      Andrew

  2. Maria says:

    I am just about to start investing, and was wondering about this, so thank you for this timely article. I also have a question about currency. I am from Canada and live in Japan, but earn in US$. I don’t know where I will retire, but probably either Japan or Canada. What currency should I invest in? Would it make sense to have two investment accounts, for example one in JPY and one in CND$, and split my investments into two currencies? On the other hand, is the US$ more reliable over the long term? I’m really confused on this point.

  3. Maria says:

    Thank you for your quick reply! I have read your first book but not your second! I read the other article but still can’t grasp why currency doesn’t matter. If I were living in Japan and my investment was in Canadian dollars, and the dollar was low relative to the yen, then wouldn’t it still matter to me when withdrawing my “pension” and converting it to yen?

    • Hi Maria,

      It would matter if you were buying a Canadian index. But that would only be part of your portfolio. When you buy a U.S. stock index, off the Canadian exchange, it’s priced in Canadian dollars but the underlying value is USD. When you buy an international index, the same thing applies, but this time, the underlying value is mostly in Euros. So you would be converting your money from Yen to Canadian dollars, but buying entities whose underlying values are not valued in Canadian dollars at all. In other words, it’s like you converting Yen to Canadian dollars, for your Canadian index; Yen to USD for your U.S. index and Yen to Euros (and a variety of other currencies) for your international index.

      Cheers,
      Andrew

    • Maria,

      Here’s another way of looking at it. For the sake of this example, imagine that there are no currency bank spreads. In other words, if you took 1 USD to a bank and asked for Canadian money, they would give you, say, $1.30. Then, as you are about to leave the bank, you change your mind. You tell them you want USD back, so you go back to the teller, give them that $1.30 Canadian and they give you $1 USD again.

      If there were no bank spreads or commissions, you would get $1 USD back. That’s what I mean by “no bank spreads and commissions,” just for this example.

      OK, so now take it to another level. You took USD and converted it to Canadian dollars. With those Canadian dollars, you choose to buy a house in Los Angeles. It was initially the perfect amount of USD to buy that U.S. house. Have you invested in Canadian dollars or U.S. dollars? It has been entirely a USD investment. Buying a U.S. stock index off the Canadian stock exchange is exactly the same thing.

      In the real world, OK, you pay about a 1% commission bid/ask spread, but no matter what happens to the USD versus the CAD, if you’re buying a U.S. stock index off a Canadian stock index, that’s all you could ever possibly lose. The bank gets the money for making the transaction, but you don’t win or lose based on where the currencies happen to be.

      So….if you convert your USD to Canadian dollars, to build a diversified portfolio of index funds, the actual exchange rate of the Canadian dollar, versus the USD, doesn’t matter one iota.

      Cheers,
      Andrew

      Cheers,
      Andrew

  4. Maria says:

    Andrew, thank you so much for the long explanation. I “think” I understand … If I have another question I will post it under your article on this topic.

  5. Prabu says:

    Hi Andrew,

    Read your book and I enjoyed it very much. I’m now reading a few more including “A random walk down wall street” and “The Intelligent Investor”.

    I have a decent sized pot of money (AUD) I’ve saved up over the years and am now 33 years old. I’m thinking of placing it an index fund, such as Vanguards Growth Fund, which is a balanced fund.

    My questions:

    1) Why would I maintain multiple index funds (US Stocks, International Stocks, US Bonds etc) and balance on my own, as well as pay fees for each one separately over a pre-packaged balanced fund consisting of roughly the same diversity.

    I believe this you balanced them yourself if your book. Although this might not be the case anymore.

    2) I’m from Sydney, Australia but currently live/work in the UK. I’m planning on ending back in Sydney, but i’m not sure when. I’ll be in London for at least the next 12 months, potentially more. Further to that, I might move to the US after my stint in the UK.

    The way I see it I have a couple of choices:

    a) Open an index fund in Sydney, and dump my AUD money in there. Take a hit monthly or quarterly transferring my GBP to top up the fund. I think transferwise is best option here in terms of transfer fees.

    b) Move my AUD money to the UK and open a fund there, take a one time hit on the conversion, and add GPB at no cost. However, come retirement time, take a second hit bringing it back to Australia.

    c) Open two funds, top up the one where I’m living at the moment. Take a hit when I move.

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