Thursday, June 19, 2014

A little perspective for the nervous Nellie...

All-time highs can make one nervous about the stock market. I know this from conversations with clients. I find myself during times like these offering more than the usual insight into my regular routine of calculating the valuations among the various sectors, and places in the world, we invest in. As I've stressed here several times of late, stocks, in the aggregate, don't look cheap to me like they did in early 2013 --- by historical norms they, in the aggregate, look (to me) reasonable. Of course some sectors look more attractive, both valuationally and cyclically, than others.

That said, whether a bloke like me thinks stocks are dirt-cheap or reasonably-priced, stuff happens that can send stock prices into a tizzy when you least expect. Which is why I forever preach the virtues of long-term investing and making sure one's allocation to the market is consistent with one's temperament --- none of this is worth losing sleep over.

In this morning's column, USA Today's John Wagner does a nice job putting record stock prices into perspective for the long-term investor. Here's a snippet (be sure to read the entire article): 
New highs are the hallmark of a mature bull market, says Sam Stovall, managing director of U.S. equity strategy at S&P Capital IQ. It's the nature of bull markets to make new all-time highs — otherwise, the S&P 500 would never have gotten past 13.55 in June 1949, its first bull market high after the index started at 10.

The average bull market spends about 7% of its life at all-time highs, according to Stovall. This bull market has been at all-time highs about 5% of its life. In long-term, secular bull markets, such as those in the 1980s and 1990s, the market spends between 12% and 13% of its life at all-time highs.

A new high, in and of itself, is probably a bad reason to sell. And there are lots of other bad reasons to sell, including:

• Politics. If you bought stocks because you thought George W. Bush would be a business-friendly conservative president, you were half right. He is a business-friendly conservative. But that doesn't mean stocks will fare well. From the day Bush was inaugurated to the day he left office, the S&P 500 lost 40%. Conversely, if you sold stocks because you thought Barack Obama was a kitten-eating Communist, you've missed a 143% gain so far.

• Pundits. Anyone who tells you to sell all your stocks isn't credible, even if he was lucky once.

• Friends. Your friend may, indeed, know that the financial system is going to collapse. Your friend may also know that he can get 537 cable channels from the fillings in his teeth. You just never know about people.

Being reluctant to sell, however, is never the same as never selling. And there are some very good reasons to sell stocks from time to time. Start with the basics:

• You've reached your goal. Let's say that your goal was to have $500,000 in your retirement account by age 65. Woo hoo! You're 60, and you have that now. If you were 70% in stocks, you can dial back. There's no need to take more risk than you need. Your main goal now will be to beat inflation — currently 2%.

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