Time to sell?
By almost every measure, the stock market in the United States has hit several all-time highs over the last few weeks.
This has led several Simple Dollar readers to write in and ask whether or not now is the time to sell. Tom, for example, writes:
鈥�With stocks being so high I am getting kind of nervous. You know the old saying of 鈥渂uy low sell high鈥� so I am wondering if I shouldn鈥檛 move my retirement savings into bonds or something else low risk for a while."
The 鈥渂uy low, sell high鈥� maxim is a tempting one to look at right now. With stocks at (or near) an all-time high, it makes sense to look seriously at the 鈥渟ell high鈥� part of the equation.
The problem with 鈥渂uy low, sell high鈥� when it comes to something like the stock market is that聽it is very difficult to tell what the 鈥渉igh鈥� is and what the 鈥渓ow鈥� is.聽
For example, right now, it appears as though we are at a 鈥渉igh鈥� 鈥� and, in comparison to stock market levels in late 2008, we certainly are.
However, we do not necessarily know where the rest of 2013, 2014, and beyond will lead us. If the stock market grows another 15% by the end of 2014, then selling now is a mistake. If it drops 15%, then selling now is a smart move.
This is when it鈥檚 important to point out that聽past performance is not indicative of future returns.
We can use the past history of the stock market to make an educated guess as to the future of it, but it鈥檚 only a guess. It鈥檚 really hard to rely on historical data because stock trading has changed so much over the past century.
For example, just thirty years ago, stocks were mostly traded by hand. Today, almost all stocks are traded electronically, most due to computer algorithms. We鈥檝e also seen a rise in hedge funds and countless other changes in how people and organizations actually invest, as well as changes in stock market rules. You can鈥檛 expect everything to unfold the same today as it did even ten years ago.
滨苍蝉迟别补诲,听the question you should be asking yourself should be centered around realistic long-term predictions about the stock market.
I am a firm believer in Warren Buffett鈥檚 suggestion that you should expect a 7% annual return聽over the long term聽from investing broadly in stocks.
The question I will always be asking myself about my retirement situation is聽do I need that 7% to reach my goal for retirement?聽Or can I make it with a smaller return?
The catch with that 7% is that it鈥檚 volatile. You might average 7% over a bunch of years, but that鈥檚 after a sequence of years that are 10%, 14%, -20%, 8%, 2%, and 11% (or something like that). When you actually reach your target date, you might have enough, you might not.
With something that has a lower return, like bonds or cash, the return is a lot less volatile. You might invest in bonds that return 3% in a much steadier fashion, for example.
If you can reach your retirement goals with a lower risk investment, then that鈥檚 the sign that you should jump ship.聽That way, you know you鈥檙e sailing securely into retirement without the bounces of the stock market.
Also, remember that this isn鈥檛 an 鈥渁ll or nothing鈥� decision. If you move half of your money into bonds that return 3%, you鈥檒l have an average annual return around 5% with聽some聽volatility, but not nearly as much.
So, what can you take home here?聽Selling high makes sense if you can move into something with less volatility and still achieve your goals.聽A high stock market may have pushed you to that point 鈥� and if it has, you should take advantage of it and lock in your progress.
If you鈥檙e聽not聽there, see how close you are and take advantage of this situation to move some of your money into something less volatile.
搁别尘别尘产别谤,听a high stock market isn鈥檛 a chance to time the market 鈥� it鈥檚 an opportunity to re-evaluate your personal goals and how close you are to them.聽That鈥檚 what matters 鈥� not the ups and downs of the stock market itself.
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