“Up until now,” one of you wrote me almost a year ago, “you appear to have leaned toward index funds and to avoid market timing. Now, you are alluding to a high market. Are you suggesting it is time to pull out?”
“If you’re a market timer,” I wrote back, “it might be time to pull back, if not out — but study after study shows the folly of being a market timer . . . especially if you’re a market timer in a taxable account.”
Well, my advice stands (well, shifts a little, but largely stands):
- Don’t be in this market on margin. (And if you pay interest on credit cards or car loans, you’re in effect borrowing at an even-higher-than-margin-loan rate to be in this market.)
- If you’re lucky enough to have money in a tax-sheltered account, lighten up on the stocks. “But you’ve been saying that for so long, no one would have anything left to lighten up,” a friend of mine ribs me. But that’s not entirely true. Say you had a retirement plan that had grown over the last few years to $150,000 in stocks when I started saying this. You shifted $30,000 worth off onto the sidelines in some safe, liquid interest-bearing investment. Then the market went up some more and you had $150,000 again. Here came my stupid advice again, and you shifted another $30,000 off onto the sidelines, or to Russia or someplace. (The Templeton Russia Fund has about quadrupled since I started writing this column a year and a half ago.) Then . . . well, you get the point. One day, people with ready money on the sidelines, earning tax-deferred interest, are going to be envied and are going to have an opportunity to put that money to good use. Of course, the way things look today, that day might not come for 100 years. But it usually comes sooner.
- With taxable money, it’s much harder to bite the bullet and sell highly appreciated securities, especially if you have a high income and live in a high-tax state. There are many approaches to this problem. One is to try to find stocks in your portfolio in which, miraculously, you have little or no gain, not because they are unrecognized gems (hang on!) but because, well, things didn’t work out as you expected (or maybe you just bought recently at today’s high prices). Sell those for a minor gain or loss, with no appreciable tax consequences, and use that money to build your resources on the sidelines.
Let me conclude with this:
There are perfectly sensible reasons to remain 100% in stocks even today (though why 100% U.S.?), especially if you’re young and you have developed the magnificent habit of simply investing a slice of your pay in the market every month.
But these two are NOT among those perfectly sensible reasons: (1) “Why should I earn 5% interest on the sidelines when I can earn 15% or 30% a year in the market?” (2) “I have to stay in the market — it’s simple math: at 5% on the sidelines, I won’t accumulate the sum I need.” They are, rather, famous-last-words reasons.