Why I'm Taking Some Chips Off The Table

Not that this announcement is going to move the markets but I’ve decided to take some chips off the table. I’m selling some stock.

I’d like to tell you why so you can make the right decisions about your portfolio.

It started with the election which seems like just yesterday. Many of us investors went to bed thinking our accounts would be down “big league” the following morning. (I’ll admit I didn’t go to bed in a good mood.)

But lo and behold the market was up the following day.

I was surprised. Many investors were. (Good thing I’m not a day trader…)

At any rate, now a month later all indexes have hit fresh highs; some hitting that milestone every trading day.

So I’m not going to cash completely because that’s never wise but I am taking some chips off the table.

Here are 3 reasons why. (By the way, I’ll explain myself in layman’s terms - no extraordinary technological jargon. I don’t think that way and I don’t think most investors think that way either.)

1) Seems like this bull market has gone on forever!

Courtesy of a fabulous blog called “On My Radar”, we are long overdue for a correction.

It has been 116 days without a 5% correction. The average number of days since 1928 was 50 days before a 5% correction occurred. In secular bull periods the average number of days was 84. In secular bear periods the average number of days was 31.

It has been 210 days without a 10% correction. The average number of days since 1928 was 167 days before a 10% correction occurred. In secular bull periods the average number of days was 331. In secular bear periods the average number of days was 91

It has been 1955 days without a 20% correction. The average number of days since 1928 was 635 days before a 20% correction occurred. In secular bull periods the average number of days was 1105. In secular bear periods the average number of days was 486.

So I don’t want to be caught napping. By the way, I think it’s interesting to note that bear markets this century have been far harsher than in prior times. I’m sure you remember (fondly) that we had two precipitous drops last decade. Both declines were greater than 50%. My suggestion is while you evaluate your risk tolerance, you should consider how you might react to such a setback when considering what mix of stocks and bonds is appropriate. I’m 50 years old now so my new motto is “no 50 after 50”, or something like that.

2) Stock prices are really, really high

The median price/earnings ratio for the S&P 500 is very high right now. Forgetting for a second the question - are stocks fairly priced, these atmospheric levels suggest (based on 80 years of history) that forward returns will be low and not what investors desire. The chart below (courtesy of CMG Investment Research) breaks out the end-of-month P/E ratios into 5 different (Quintiles) from lowest to highest. Quintile 1 is lowest (best) and Quintile 5 is the highest (worst).

Currently, the median P/E ratio of the S&P 500 is in the 5th quintile. (The worst.)

As you can see just above, when stock prices are this high, the 10 year annualized returns moving forward are the lowest. (See above - circled in red). In case you’re wondering the opposite holds true as well. In February, 2009, at the start of this bull run, the median P/E ratio was solidly in Quintile 1.

The important takeaway from this research (according to the authors of a white paper titled of The Total Portfolio Solution) is that risk is lower and returns are higher when the market is inexpensively priced, and risk is higher and returns are lower when the market is expensively priced.

3) The world seems “out of sorts”

From a geopolitical perspective, more than a few unsettling events have occurred recently (Brexit/U.S. Election) but nothing seems to push the bulls into hibernation. It can’t go on forever. As I type this, it seems that the US will investigate Russia’s perceived involvement in our election. Trump’s tweets (and his my way or the highway brand of diplomacy) may cause difficulty going forward with China. Taxes may come down for some but not all of us. Social security and medicare may be radically different a few years from now. Changes to healthcare are on the horizon and that’s unsettling to many.

Lots to consider and, as a guy I follow said recently, “It just doesn’t seem quite right.”

So I’m taking some chips off the table. What I see with my clients is that as they age, they’re more likely to abhor a 10% loss than lament missing out on a 10% gain. I’m the same. So let’s take some gains together. The markets may have more to run; but I’m confident that when the next buying opportunity presents itself, I’ll have some money to spend.

I hope the same for you!


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This views expressed here are those of (Darryl Rosen) and does not does not take into account your particular investment objectives, financial situation or needs and may not be suitable for all investors. It is not intended to project the performance of any specific investment and is not a solicitation or recommendation of any investment strategy.