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Should I Sell Stocks Now? What to do Now That Markets are Peaking

By in Advanced Investing, Asset Allocation, Bond, Economics, Investing, Money Management | 15 comments

Are the Investment Markets Overvalued?

Should I Sell Stocks Now?

Should I Invest in Dividend Stocks Now?

Should I sell stocks now or hang on? What to do now that markets are overvalued?

Is the Stock Market Overvalued Now?

According to many stock market indicators the stock markets are expensive. After the nine year bull market, find out if you should sell stocks now.

An easy way to check the stock market price tag is with the price earnings ratio (PE ratio), or the amount of money you must pay in relation to a corporations earnings. Higher PE ratios correlate with more expensive stock prices.

The average PE ratio is 15.67 and the stock market PE ratio today is 24.69. That’s 57% overvalued, according to multpl.com. Eventually, the market will revert back to it’s historical averages, which means stock prices are likely to fall.

“The market can remain irrational longer than you can remain solvent” ~John Maynard Keynes

This timeless quote is a reminder that picking market peaks is tough. Despite an overvalued market, stock prices might continue to rise.

Overpriced markets and asset bubbles are a long term economic reality, dating back to the Holland tulip bulb mania centuries ago. At the end of last century, the new normal was “technology stocks cannot fail.” And yet, after the internet boom of the late 1990’s the beginning of this millennium saw the S&P 500 tank. The market fell -9.03%, -11.85% and -21.97% in 2000, 2001, and 2003.

Today, as stock prices hit record highs and real estate is soaring, my inbox is filled with questions. It appears when markets peak or tank, investors worry:

  • Is there something I should be doing differently with my investments?
  • Should I sell stocks now?
  • With savings account return’s so low, should I buy high dividend stocks?
  • Should I get into the market now, since stocks are going up?

Expert Advice-What Not to do With Your Investments Now

Don’t panic!

If you’re a long-term investor with years until you’ll need your investment dollars then keep a cool head and stick with your plan. If you have set up an asset allocation in line with your risk tolerance, with a certain percent of your investment dollars in stocks and another percent in bonds or fixed assets, then, stay the course.

Investment professors (myself included), John Bogle (founder of the Vanguard Fund Group), and Burton Malkiel (author of A random Walk Down Wall Street) advise investors to keep their funds in an asset allocation in line with their risk tolerance. Over time, if you believe the US and global community will continue to prosper, then remain invested. and accept that the investment markets are volatile and despite periodic declines, over time stock prices go upward.

If you don’t already have an asset allocation set up in line with your risk tolerance, set one up now. If you do, and the percentages are more than 5% away from your target, then rebalance your portfolio. That’ll force you to take some profits in your stock investments.

Bonus: Asset Allocation Guide

Should I Sell Stocks Now?

If you’re worried about an upcoming market crash, there’s nothing wrong with selling some of your stock holdings now. Just realize that in doing so, you might miss additional profits if markets continue to go up.

It’s difficult to pick the absolute peak or trough of investment markets. So, even if you sell now, and markets drop, you’ll need to decide when to get back in. That’s why most professionals suggest avoiding trying to time the markets.

Sell Stocks Now – Advantages

You’ll lock in some of the investment gains.

You’ll be prepared should markets tank soon.

Sell Stocks Now – Disadvantages

Unless you sell at the absolute market peak, you’ll miss further gains in your investments.

You’ll need to decide the best time to reinvest back in the markets and may miss potential profits if you’re not invested as markets go up.

Best Answer to the Question: Should I Sell Stocks Now?

Not necessarily!

Rebalance your investment account if it’s out of whack. For example, if your preferred asset allocation is 70% stock investments and 30% bonds, and it’s drifted to an 80% stock and 20% bond ratio, you’ll sell 10% of your stocks and stock funds. Use the profits to reinvest in bonds and bond funds.

Or a lazier way to rebalance is to use new investment money for bond investments only, so that eventually, you’re whole investment pie will return to your desired 70% stock v 30% bond mix.

If you’re worried about putting new monies into an expensively valued stock market, then dollar cost average. Although, if you’re investing in your workplace 401(k) or 403(b) a specific amount monthly, you’re already doing that.

Ultimately, your investment dollars should be long term money to be used in retirement or goals that are 5+ years away. So, don’t be surprised if your stock investments fall periodically, that’s all part of the natural investment cycle. If it’ll make you feel better, go on and sell some of your stocks, but staying completely out of the stock market could deprive you of reaching your long term financial goals.

As an investor, simply understand that there’s risk in every investment, and your job is to understand that risk, prepare for it by remaining diversified and don’t panic as financial markets go up and down.

 

A version of this article was previously published

    15 Comments

  1. I have no predictions! I just keep dollar cost averaging into the market. I have an asset allocation that tempers the volatility of the market. Besides I am thinking very long (25-30 years) term. I am in a somewhat unique situation where I am not dependent on income from investments to live in retirement. It makes it much easier to tolerate the fluctuations.

    krantcents

    March 14, 2013

  2. No predictions here either. 🙂 I am not really making any changes in our portfolio as I like to take the long term view of our investments. Fluctuations happen and I am ok with that as it’s to be expected. If any changes are going on, it’s just to make sure there is no rebalancing to be done…but that’s something I look at on a quarterly/semi-annual basis anyway.

    John S @ Frugal Rules

    March 15, 2013

  3. (1) I agree with John S. Rebalancing is part of the asset allocation and should be done in regular, pre-set intervalls.
    (2) We tend to forget that modern life entails (often hidden) financial risk whether one is invested in any risky assets or not. As a matter of fact, history shows that investing in risky assets has countered one such hidden risk, purchasing power risk. Thus, investing in risky assets actually lowers overall financial risk.
    (3) I recently read a study which showed that investors who jumped on the bandwagon after large moves underperformed the steady investor who stuck to her portfolio allocation by 7% per year!

    CT

    March 15, 2013

  4. @Krantcents-Dollar cost averaging is the best approach in my opinion. And a wonderful accomplishment not to be dependent upon investment income in retirement.
    @John and CT-I’m not at all surprised by the study. The psychology of following the herd is quite a problem for many. That is why the empirically supported dollar cost averaging is the sensible approach to long term wealth building.

    Barb

    March 19, 2013

  5. We actually think there’s a good chance the stock market will run further. While we’re raising stop losses (the WE is OG and I), we’re doing nothing different other than rebalancing.

    AverageJoe

    March 20, 2013

  6. Joe, It’s so difficult to predict the top. (the middle and bottom). Setting stop loss is one way to try and cut your losses. Keep us posted as to how it works.

    Barb

    March 20, 2013

  7. The market is difficult to predict at the moment, but I think it is really peaking, but people should still be careful about investing their money.

    The College Investor

    March 21, 2013

  8. @The college investor, Definitely don’t want to pile into the stock market while it’s nearing a peak!!

    Barbara Friedberg

    March 21, 2013

  9. It’s so hard to determine what the stock market will do since the economy is still so delicate. However, I think each person has to determine their risk tolerance; if they can stomach the ups and downs of the market and invest for the long haul, then investing now might be fine for them. As for myself, I’m risk-averse. I like mutual funds.

    Little House

    March 22, 2013

  10. @Little HOuse, One’s risk tolerance is such an important concept. How will you react to the normal volatility in asset prices? If you are more risk averse, better off with less percent in stock investments and more in bond and cash investments.

    Barb

    March 22, 2013

  11. There’s too many uncertainties in the market right now and I would have to say take small baby steps until there is a clear direction of which way the economy is going. I don’t think we are hitting the peak yet, and investment markets are are not really overvalued now. For me, I’m just playing the waiting game. i’m not making any moves really.

    Pat Drummond

    March 22, 2013

  12. Nice post and good advice. John Hancock has been running a series of commercials showing upscale couples talking to an advisor with the them “… its time to invest…” My question is what the heck where these people thinking over the past 4-5 years. Sadly many of them will get in now and get creamed in the next market downturn.

  13. @Pat-Picking the direction of the markets is a fools errand. No way to know for certain, except in hindsight.
    @roger-Well put. So many investors wait to jump into the markets until the largest upswing is over. Best to stay invested and avoid timing the market…. as you certainly know 🙂

    Barb

    March 24, 2013

  14. If you step back and look at the earnings of the companies that make up the stock market, I believe this time round the market is not as overvalued as the last time when it passed through this level.

    Therefore, I believe we’ve not reached “bubble territory” yet. Your comments regarding bubbles are certainly right on. But I don’t think we’re there just quite yet.

    Looking away from the stock market to the economic cycle, we see almost every cycle last 7-10 years, bottom to bottom. Given that the last bottom was in 2009, I believe we still have a few more years before “the next one” (recession) hits. For a chart showing the cycles for the past 70 years or so, check this out: http://bit.ly/economy_chart

    William @ Bite the Bullet

    March 25, 2013

  15. @William, Good points. Actually, it’s quite difficult to pinpoint the next bubble. Even if we are not near a market peak, we are certainly a lot closer than we were during the past few years. I advise, “don’t try to time the markets.”
    (The Shiller PE, one measure of market valuation has the markets approaching a peak.)

    Barb

    March 26, 2013

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