Stocks are at a 5 year high, now what?

[Rick Ferri]

Buy? Sell? Rebalance?

The Wilshire 5000 broke new highs last week. What does that mean for the market?

I really don't know, but history shows that New Highs Don’t Lead to Selloffs.

Rick Ferri

PS. This is not market timing. I do not time markets. This is a history lesson.

[bertilak]

Now what?

Root for a 10 year high!

[daytona084]

My Investment Policy Statement does not call for any particular action to be taken in the event that stocks reach a 5-year high. So I will do nothing out of the ordinary.

Good answer?

[EternalOptimist]

Nothing. I suppose that's positive reinforcement to 'stay the course'

[JW Nearly Retired]

Rick,
Past performance rules!

Is it actually true that investors are only just now starting to shift back into equity funds, or is it just media hype? I've tried to find actual data on net fund inflows without any success. All I find is financial news blather.
JW

[Clearly_Irrational]

The market is within what I would call the rational range of 10-25 on the Schiller PE10 so at the moment no action is required. Outside of that range it might be time to evaluate the situation and see why things are so distorted to determine if anything out of the ordinary needed to be done.

[midareff]

Now what?

yawn... is there supposed to be something to do?

[wjo]

But they do lead to rebalancing! Just took some gains to rebalance last week in my sheltered accounts. Now I can root for a big sell off to buy some cheap shares

[dad2000]

Rick,

Excellent article.

There's also a lot of noise about increased insider selling, and that being a broad sell indicator. Perhaps this could be a topic for another article?

Thanks for helping us all.

[Whatyear?]

I'm actualy thinking of doing some off-cycle rebalancing because of the highs. I ended last year about 1% higher in equities than I planned, and so far this year (one month into it) my YTD gains are > than 60% of what I was "planning on" (i.e., assuming a conservative, steady growth rate) for the whole year. So I might take some off the table. I'm only taking a portion of the current year gains, so if the market continues to go up I'm still well in, and if it goes down I'll be glad I took my gains.

[EternalOptimist]

Isn't this where the 'regular folk' come in...buying high

[Aptenodytes]

I'm actualy thinking of doing some off-cycle rebalancing because of the highs. I ended last year about 1% higher in equities than I planned, and so far this year (one month into it) my YTD gains are > than 60% of what I was "planning on" (i.e., assuming a conservative, steady growth rate) for the whole year. So I might take some off the table. I'm only taking a portion of the current year gains, so if the market continues to go up I'm still well in, and if it goes down I'll be glad I took my gains.

That's kind of weird way to approach the rebalancing question isn't it? Any plan for equity returns on a one-year time frame is going to have gigantic error bars. I can't see how it is relevant to anything. But maybe you end up close to the same place you would with conventional rebalancing, in which case don't mess with success.

[hazlitt777]

Now what? Rebalance. And if you don't have commodities in your portfolio...add them:>)

[Rick Ferri]

How what? Rebalance. And if you don't have commodities in your portfolio...add them:>)

Ha, ha. Funny guy.

Yes, I agree with rebalancing if it's "time" or equity gains have put your portfolio over a percentage band.

Commodities? Well, that's your call. I'm not smart enough to time the price of wheat or pork belly futures.

Rick Ferri

[zed]

I have pork bellies in my future.

Mmmm bacon.

Zed

[Whatyear?]

I'm actualy thinking of doing some off-cycle rebalancing because of the highs. I ended last year about 1% higher in equities than I planned, and so far this year (one month into it) my YTD gains are > than 60% of what I was "planning on" (i.e., assuming a conservative, steady growth rate) for the whole year. So I might take some off the table. I'm only taking a portion of the current year gains, so if the market continues to go up I'm still well in, and if it goes down I'll be glad I took my gains.

That's kind of weird way to approach the rebalancing question isn't it? Any plan for equity returns on a one-year time frame is going to have gigantic error bars. I can't see how it is relevant to anything. But maybe you end up close to the same place you would with conventional rebalancing, in which case don't mess with success.

Not really. But the key/my basis for saying that is that what I did was in line with my original plan for rebalancing/AA. I'm about 7 - 10 years from retirement and taking the glide-path approach of bringing my equity percentage down by 1% per year until I hit 50%. I was 1% off that as of the end of last year, so taking these gains now re-set that. I wouldn't have done anything if it were going against my plan.

[hazlitt777]

How what? Rebalance. And if you don't have commodities in your portfolio...add them:>)

Ha, ha. Funny guy.

Yes, I agree with rebalancing if it's "time" or equity gains have put your portfolio over a percentage band.

Commodities? Well, that's your call. I'm not smart enough to time the price of wheat or pork belly futures.

Rick Ferri

Thank you. I'm trying to incorporate more humor in my life.

[Random Musings]

Would be interesting if CXO would break this out at various Shiller PE 10's (like 5-10, 10-15, 15-20, 25-30).

Bet it tells a different story.

RM

[Cruncher]

Rick,

What am I going to do? I'm gonna "stay on timeline". Does that bring you back to your 7523 days? If my portfolio indicates a rebalance, then I'll rebalance. If not, then I'll continue to chase the laggards with new monies.

I'm guessing, the 5-year high will incite the greed emotion and the "average" investor will start talking stocks again at social events; they'll start buying equities again, pushing markets even higher. Then later in the year, the institutional investors will sell locking in gains for their end of year statements (leaving the small investor holding the bag - again). As the large money moves outta equities, it needs to go somewhere. Where, well probably into the laggards, pushing them up.

Of course, I could be completely wrong, good thing I don't time markets


Cruncher

[pascalwager]

The 5-year high information has no operational significance, so there's nothing to do.

[ResNullius]

Now what?

Root for a 10 year high!

Which will take us back to where things stood 10 years ago, meaning zero gain over 10 years. The way I see it, we need to recover everything lost since March 2000, then add at least the rate of inflation to come up with a truly new high...or even with 10 years ago. We then need to start growing at 6 to 8% from there at an annual rate, at a minimum, then folks can talk about whether the market is getting too high.

[steve r]

Stocks at a high ... now what? ALL STOCK PORTFOLIOS ... see another thread ... why not!

http://www.bogleheads.org/forum/viewtopic.php?f=10&t=110492&newpost=1608964

**

Rick - Interesting results on your website. You did state "relatively low volatility" (after a high) .... is weekly 1.5-2 standard deviations low by historic standpoints? It seems to outstrip the cumulative gains over 13 weeks.

[jeffyscott]

The way I see it, we need to recover everything lost since March 2000, then add at least the rate of inflation to come up with a truly new high...or even with 10 years ago. We then need to start growing at 6 to 8% from there at an annual rate, at a minimum, then folks can talk about whether the market is getting too high.

According to m*, growth of $10,000 chart VTSMX has grown by a cumulative 44% since March 2000. Cumulative inflation is about 34% over that time.

I do worry that US stocks are too high, but then I notice bonds are at an all-time high and cash pays next to nothing...and then I also notice that we now have only 17% of assets in US stocks.

[z3r0c00l]

How many 5 year highs can you find during the 1980s and 1990s? And how often did the market revert back to those? Make no mistake, it is entirely likely that we will never see these numbers again. Selling now means you likely will either have to stay out of the market for life, or get back in at a higher number. What good would that do?

[bertilak]

Now what?

Root for a 10 year high!

Which will take us back to where things stood 10 years ago...

Unless you had very little invested in the market 10 years ago.

[mickeyd]

Rick is just stiring up trouble. Or he is trying to get us to think? I think.

[Sheepdog]

When the market reaches a new high, Vanguard changes the Target Retirement allocations.
They did it at least twice at that time including this year.

[Bustoff]

BTD

http://www.zerohedge.com/news/btfd
(PG13)

[rj49]

Isn't this where the 'regular folk' come in...buying high

Of course, after selling stocks low in 2007-2008 and moving into bonds. But now I'm missing out on the Great Rotation from bonds to stocks and my bond fund is being decimated (down .5% YTD), and Jeremy Grantham just wrote 'bonds? fugetaboutit' so I need to switch back to stocks...but wait, he said those are overpriced except for Quality stocks, but he won't say which stocks those are! He said to buy potash...is there a potash ETF? Maybe I'll follow Larry's fat tails portfolio, that will keep me safe but make me rich...yummy free lunch...or maybe Harry Browne...or Wellesley, that never loses money...doggone it, when will Vanguard introduce an international gold/potash ETF? (cue headless running chickens).

[jeffyscott]

Jeremy Grantham just wrote 'bonds? fugetaboutit' so I need to switch back to stocks...but wait, he said those are overpriced except for Quality stocks, but he won't say which stocks those are!

Not hard to find out which stocks he is talking about, their portfolios of quality stocks are not exactly a secret, try looking at funds like GMO Quality III, IV, V or VI.

You can also find Vanguard funds that emphasize quality, such as Dividend Growth or the similar index from Vanguard.

[riverguy]

How many 5 year highs can you find during the 1980s and 1990s? And how often did the market revert back to those? Make no mistake, it is entirely likely that we will never see these numbers again. Selling now means you likely will either have to stay out of the market for life, or get back in at a higher number. What good would that do?

Why did the market ramp so hard in the 80s and 90s? 80s is when total systemic debt really started to ramp up. 90s is when the internet went mainstream. To simply say the market always goes up without considering why is ignorant. Look at the 2000s. Flat. This current market is entirely pumped up on easy money, HFT, QE, and legalized bank balance sheet fraud. It's no coincidence the rally started with elimination of mark to market.

The stock market is disconnected from the real economy. Is the economy the same as 2000 or 2007 because those are the levels we are at now. [political and economic policy comments removed by admin alex] Someone mentioned insider sales. Why is Schmidt selling almost half of his GOOG shares when GOOG is at an alltime high? You make money selling at the top. Wall Street knows this. They need retail bagholders to sell to which is why you hear nothing on tv except GET IN OR YOU'll MISS THE RIDE. Remember you don't make money until you sell.

[desertbandit442]

DCA and stay the course. This might be the low for the next five years?

[LH]

1,552.87 intraday trading March 24, 2000 sp500.



http://www.westegg.com/inflation/infl.cgi

What cost $1552.87 in 2000 would cost $2044.71 in 2012.
Also, if you were to buy exactly the same products in 2012 and 2000,
they would cost you $1552.87 and $1164.51 respectively

So the inflation adjusted all time high for sp500 would be circa

2044 SP500.

as with inflation money has lost one third of its value in 12 years. Things cost 32 percent more now compared 2000 to 2012.

What cost $1 in 2000 would cost $1.32 in 2012.
Also, if you were to buy exactly the same products in 2012 and 2000,
they would cost you $1 and $0.75 respectively

.


http://data.bls.gov/cgi-bin/cpicalc.pl? ... year2=2012

The government bls one has it at 33 percent. 2000 to 2012, 1 dollar 2000 equals 1.33 dollars in 2012.

So stocks have a way to go to get to real high inflation adjusted versus money illusion.

PS Let me know if I have that right. I have ignored dividends, as its just buying the market at a value, not taking into account dividends that have been paid out in past, and are already gone/sunk.

[jeffyscott]

I have ignored dividends, as its just buying the market at a value, not taking into account dividends that have been paid out in past, and are already gone/sunk.

I don't think that is a valid way of looking at it. It's not like you are buying a car, what you are buying is the future returns. So if you never sell it is the opposite, the stream of dividends is what you are buying.

However, I think it is pretty bad when the price of stocks has not even matched inflation for such an extended period.

(yes, the cpi calculator indicates 33% cumulative inflation)

From Shiller's monthly data the "real" high was 1968 in 2000.

BTW for $1500 or so you got $16 dividends, $53 earnings in 2000, while today for a similar price you get about $31 dividends, $88 earnings.

[LH]

I have ignored past dividends, the potential future dividends book value etc etc result in the market price.

Ie it's a price one buys at now, does not include past dividends. needs to be corrected for inflation to compare 2000 price/level to 2013 level

[ArthurDent]

PS. This is not market timing. I do not time markets. This is a history lesson.

By simple logic, we can discount any analysis that says "Markets are at 5 year highs, therefore they will...". All you need to consider is that if one cannot predict the future when markets ARE NOT at 5 year highs, why should one be able to do so when markets ARE at 5 year highs?
Edit:typo

[OnFire]

"Be greedy when others are fearful, and fearful when others are greedy."

[jwblue]

"Be greedy when others are fearful, and fearful when others are greedy."

I like this quote.

I can't figure out. Are people greedy now or fearful?

I am guessing greedy since people have made profits and want more.

Or are people fearful that the market will go down?

[leonard]

rebalance. stay the course.

[hsv_climber]

It is now called the "Great Rotation".

Retail investors in January plowed a record $30 billion into stocks and exchange traded stock funds (ETFs). This is the fastest inflow since 2000.

[Leif Eriksen]

Since I'm in the accumulation phase it's like hearing that the price of gas is going up (which, in fact, it is). Not much I can do about it.

[Tabulator]

The market is within what I would call the rational range of 10-25 on the Schiller PE10

Do you have any good links to describe the metric in greater detail?

[Clearly_Irrational]

The market is within what I would call the rational range of 10-25 on the Shiller PE10

Do you have any good links to describe the metric in greater detail?

It's nothing fancy, just a PE ratio with the earnings averaged over the last ten years. Type "Shiller PE10" into Google and you'll get a ton of links.

Here's one I just found: http://turnkeyanalyst.com/2011/10/the-shiller-pe-ratio/

[FrugalInvestor]

I'm just standing here.

[chipmonk]

Since I'm in the accumulation phase it's like hearing that the price of gas is going up (which, in fact, it is). Not much I can do about it.

Yeah, same here. A new market high is good for my ego but not for much else...

I just bought more stocks but not because I'm trying to chase performance, simply because I needed to do a bit of rebalancing with new money to stay at my target AA.

[ArthurDent]

"Be greedy when others are fearful, and fearful when others are greedy."

This is just market timing. How do you decide whether greedy is greedy enough. Were people fearful in October 2008? If yes, and you went all in, leveraging to the hilt, would you have gone bankrupt in March 2009?
Have a plan and stick to it. Avoid drama.

[Clearly_Irrational]

"Be greedy when others are fearful, and fearful when others are greedy."

This is just market timing. How do you decide whether greedy is greedy enough. Were people fearful in October 2008? If yes, and you went all in, leveraging to the hilt, would you have gone bankrupt in March 2009?
Have a plan and stick to it. Avoid drama.

If I were going to do some timing then:

Generally a good bet to go all in like that would be after a 50% market crash from peak. So, I'd back up the truck if we went below 7000ish if you use Feb 12th as the high point.

If PE10 went over 30 I'd seriously consider lightening up on equities.

FYI, I don't do this as I consider the timing too difficult to get right consistently.

[mojorisin]

Rick,

What am I going to do? I'm gonna "stay on timeline". Does that bring you back to your 7523 days? If my portfolio indicates a rebalance, then I'll rebalance. If not, then I'll continue to chase the laggards with new monies.

I'm guessing, the 5-year high will incite the greed emotion and the "average" investor will start talking stocks again at social events; they'll start buying equities again, pushing markets even higher. Then later in the year, the institutional investors will sell locking in gains for their end of year statements (leaving the small investor holding the bag - again). As the large money moves outta equities, it needs to go somewhere. Where, well probably into the laggards, pushing them up.

Of course, I could be completely wrong, good thing I don't time markets


Cruncher

So.... what are the "laggards"? I can't seem to find anything that has been beat down.

[nedsaid]

Stocks are at a 5 year high, now what?

What do I do now? I know, Money magazine will tell me what to do!! It arrived yesterday!!

[wander]

I do nothing out of ordinary.