Don’t try to time the bull market’s end

By Elliot Raphaelson
Posted on October 31, 2018

The bull market in stocks has lasted almost 10 years. Is it time to take profits and leave the stock market?

In recent years, many experts have predicted — incorrectly — that it is time to reinvest somewhere else. And the precipitous drop in mid-October shook some investors’ faith in a continuing bull market. Frankly, I have no idea when this bull market will end, and neither does anyone else with certainty.

Jason Zweig, a financial analyst who I respect, wrote a relevant column recently in the Wall Street Journal. He pointed out that, since the bull market started, the total return for stocks has been more than 400 percent.

The case for sitting tight

However, Zweig also noted that U.S. stocks are not cheap now, selling at about 32.8 times their long-term average earnings, adjusted for inflation, according to data from economist Robert Shiller at Yale University.

Zweig also pointed out that analysts expects interest rates to rise, that some large technological companies are faltering, trade wars seem to be spreading, and emerging market economies are struggling.

Despite all these factors, Zweig believes that the right thing for long-term investors is “to do nothing” most of the time. He goes on to reference Nobel prize-winner Daniel Kahneman, a psychologist, whose opinions I respect, who has often said that one of the keys to successful investing in the long run is “minimizing your future regret.”

Zweig interprets that to mean that “the bigger, more frequent steps you take, the more opportunities you create to look back and regard them as mistakes.” He believes that “all your actions should be small, gradual and reversible.”

His advice is sound, and I have followed this approach for almost all the years I have been investing.

But don’t forget to rebalance

As I have indicated in many of my columns, when I retired about 20 years ago I developed a portfolio of approximately 50 percent in bond funds and 50 percent in diversified common stock funds, mostly index funds.

After determining the amount that I had to withdraw to meet recurring living expenses, I made regular monthly withdrawals primarily from the bond funds. At least once a year, I rebalanced my portfolio [to keep the same percentage of stocks and bonds].

Since almost all of my investments were in retirement accounts, I could sell stocks as necessary without incurring any capital gains taxes. I have followed this approach throughout my retirement, which included both good and bad years for the stock market.

Using this approach, whenever the stock market did poorly in a particular year, by rebalancing at the end of the year I was investing more in common stocks and less in bonds.

And during the last nine years, when many stocks were rising, by rebalancing at the end of each year, I took some profits from the common stock side of my portfolio and re-invested them into bonds.

Naturally, if I had advance knowledge that the stock market would do so well, my portfolio would be worth more today without rebalancing. But I have no regrets because I know I will never be able to predict high and low points, and I don’t have confidence that anyone else can.

Other common sense advice

Since I retired, I have been able to earn some additional income through teaching and writing. I have used dollar-cost averaging, putting this income into diversified common stock funds, never trying to predict tops and bottoms. This approach has worked well for me even though there have been years in which stocks underperformed.

Many investors, facing a drop in the market about 10 years ago, sold all their stocks and never came back, thus losing the potential gains of the last nine years. They decided not to take small gradual steps, but instead made one large step, trying to out-guess the market.

Even Warren Buffett doesn’t try to guess tops and bottoms. If you want to succeed in the markets, decide how much risk you are willing to take, structure your portfolio accordingly, and take a long-term approach, making gradual steps.

Don’t try to predict tops and bottoms. No one can!

Elliot Raphaelson welcomes your questions and comments at raphelliot@gmail.com.