Time to Sell?

As Investors we seem to often be asking ourselves the question of whether we should try and anticipate the next big market downturn by selling everything. But the average increase of the market over the past 100 years has shown us that we are often better off too just stay invested. In his podcast the other day, Jim Cramer said that there have only been two serious downturns in his lifetime; in 1987 and 2008. In my case it has only been 2008. I remember that the Covid-crash in 2020 was big, but the market returned to its prior levels within a few months once the vaccines were developed. What felt worse than the short lived Covid-crash was 2022, when the S&P 500 lost 18.6% In order to try prevent participating in these kind of losses you would have to sell and buy back in, which would require making two well timed decisions. Or you could buy into the market and just hold through the ups and downs. Which strategy is better, and is it even possible to time the markets correctly.

From 1900 to 2020 world stock markets have returned 8.3% So in theory it should be pretty easy for the investor to beat the average market returns? Well not if you brought into the market near the peak in 1929, 1987 or 2008. In 2008 you would have to wait 5 years just to break-even. But hypothetically if an investor sold at the top in 2008, and brought back in near the bottom in 2009 then absolutely they could shatter the average market returns. But is this realistic? Well, if you had a crystal ball or the ability to tell the future then it is realistic. But most of us we can't tell the future. We can though, study the past. And what the past shows is that PE (price-to-earnings) Ratios over the last 100 years have been around 20, and currently they are 33.7, in the US Markets. This would suggest that the market is overvalued. By the same token though, the earnings growth rate of stocks have gradually increased over time, which in a way justifies the higher PE multiples. Market multiples used to be dominated by slow growing companies like Ford and US Steel, whereas today it is dominated by faster growing organizations like Microsoft and Nvidia.

With the current market valuations looking a bit stretched, it would be silly to not to a bit of selling and keep some cash on the sidelines. The stock markets do appear to be a bit overvalued, but there is no way of knowing really if the bull market doesn't still have a couple of years left in it. But if you trade with Hatch or Sharesies, the money that you do not have invested is held in a money market fund, which will currently yield you around 5% on your uninvested funds. This is only around a 3% opportunity cost to the 150-year market average returns of 8%. If there is a downturn on the horizon you will not regret having some money on the sidelines, particuarly if you trade with Hatch or Sharesies.