Jeff Voudrie’s Weekly Stock Market Commentary – November 11, 2015

Jeff Voudrie’s Weekly Stock Market Commentary – November 11, 2015

Jeff Voudrie’s Weekly Stock Market Commentary – November 11, 2015

Jeff’s Weekly Stock Market Commentary: Secret To Buying Low and Selling High

Everyone wants to sell high and buy low.

The old adage about investing is that you should buy low and sell high. And that is sage advice. The question is how do you put that into practice? This may sound simplistic, but in order to buy low you first have to sell high!

The S&P 500 set all-time highs last July. ALL-TIME.  So, does that mean that you should sell now and move to cash and/or US Treasury bonds and wait for the market to correct?

In 2000, the market hit an all-time high and declined soon after 46%. In hindsight, any time between March and September of 2000 would have been a great time to sell all of your equities and move to cash. Those that did would have maintained their account balance while those that didn’t sell likely saw losses of 46% or more. Those that didn’t sell their stocks and instead held through that crash missed their chance to sell high.

So what did they have to do? Some got out of the market and never got back in. Those that stayed in had to wait a long time to see their account balance recover—in fact it took them until 2007 for the S&P 500 to get back to where it was in 2000.

On the other hand, those that got out could have bought back in anytime in 2003 and would have seen their wealth increase almost 50% if they held into November 2007.  That’s when we hit all-time highs again. That was another opportunity for those that missed getting out in 2000 to learn from their mistakes and get out again.squirrel-1004893_1920

The problem is that the market had been going up pretty steady for almost 5 years without a serious correction. And there was every indication that it could do so for a few more years.  And virtually all the experts on TV were saying that everything was great! (Sound familiar?)

Thinking the party would continue longer, very few investors took advantage of their opportunity to sell at all-time highs.  Most of those investors that failed to get out early probably ended up losing up to 50-60% of their wealth…again.

Remember, you can’t buy low unless you first sell high.

Interestingly, the S&P 500 (and other stock market indexes) didn’t suddenly crash without warning. In the crash of 2000, the S&P 500 had an 8-10% correction in January and February. Then it powered back to an all-time high in March of 2000. Then it quickly dropped 12% again in a matter of a few weeks.  It moved back up within a few points of the all-time high again in early September. Then it started to drift down…and down until it finally hit bottom in 2003. Then terrorist attack on 9/11/2001 accelerated the decline, but it had already fallen 30% before then.

In other words, investors had several opportunities to get out over a period of months without significant loss.

Investors had a similar opportunity to get out near the all-time highs again in 2007. The S&P 500 hit an all-time high in November and started to drift down.  The market had been moving up without significant correction for almost 5 years. Those that moved to cash anytime in 2007 or the first quarter of 2008 would have spared themselves the emotional turmoil of another roughly 50% decline that followed.

In other words, investors had several opportunities to get out over a period of months without significant loss.

We all want to be able to sell high and then buy back in when stocks are low.  Invariably, no one will top tick selling at the absolute high. The good news, though, is that you don’t have to.  Sometimes we can be so focused on the daily fluctuations that we miss the big picture.

dad-909510_1280For instance, I have been warning investors for several months that it is time to sell high. Since then, we saw the major market indexes drop over 10% over a period of a few days in August. Those that sold during the pain associated with that crash may feel that they made a mistake because the markets have mostly recovered.  Some are even using the fact that the markets recovered and evidence that all is OK—just like they did in 2000 and again in 2007.

I can’t tell you exactly when the next major market crash will start. It is possible that is has already started because even with the market recovering we still haven’t surpassed the summer highs in the S&P 500 and the Russell 2000.

The correction in August could be the harbinger of more volatility ahead. Or the markets can continue to go up. But here is the point: it is highly unlikely that you will get out at the perfect time. Let’s say that by getting out now you miss the S&P 500 going up another 5%. How much will that matter is sometime in the next year the market drops 20% or more?

I believe that we are at that point where it behooves investors to move out of the stock market while it is still at or near all-time highs. I suggest moving to cash or US Treasury Bonds now. It’s up to you whether you do it incrementally or all at once, but the main point is that you are once again in the position to sell high and lock in your gains of the last several years.

That’s why the accounts I manage have little to no exposure to stocks (for full disclosure I actually have some minor short positions in some major stock indexes in most accounts). I have mainly invested in US Treasury bonds between 3 and 30 years in duration. That allows me to earn dividends in the 1-3% range and not be exposed to a significant market decline. There is some risk in owning US Treasuries versus cash but treasuries have the potential to appreciate significantly if or when the stock markets correct.

 

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