Now that we’re at close to record highs heading into 2016, I’m left wondering now whether it’s time to sell everything. We’re already 7 years into a bull market and nothing goes up in a straight line forever.
If you’ve been 100% invested in equities since the beginning of the year, you are likely only up 11%. If you’ve got a 50/50 mix of equities and bonds, you’re likely up in the mid single digits.
It’s always a good time to reassess one’s portfolio once a quarter, especially towards the end of the year. One should take a view on the markets in 2013 and rebalance accordingly. If you’ve been following my site for a while, you know that I have a very optimistic outlook on many things. Perhaps it’s because things are so robust in San Francisco thanks to so many great companies like Apple, Facebook, Google, YouTube, Twitter, and eBay all thriving. Then again, I’ve always been very upbeat.
Below are some positives and negatives I can think about that will help in the thinking process.
The positives: Interest rates are still low (as investors flee to bonds), unemployment is around 5%, oil prices are low meaning lower input costs.
The negatives: EuroZone debt crisis, China crisis, oil going to zero, US state budget woes, political gridlock.
Positive anecdotes: Raised rent by 10% in one of my rentals this fall. Vacation rental pre-bookings to Lake Tahoe have been the strongest I’ve seen in years. Buses are so jam packed they skip stops, necessitating I walk three stops away to get on. I have to call at least a week in advance to get reservations at a restaurant that averages $75 a person. Zynga is looking to go public with a US$10 billion valuation in December. Facebook is looking to raise $10 billion with a $100 billion dollar valuation in 2012. Google had blowout 3Q results, even at its large size. Online advertising income has been consistently on a stable to upward trajectory all year. A friend went from an average $3,500/month two bedroom rental and bought a $3 million house out of the blue due to a liquidity event. A couple friends are finding jobs and leads again when they couldn’t this summer.
Negative anecdotes: Compensation firms think bonuses will be down 20-40% in the financial industry on average. Mass layoffs at companies such as American Express and the US Postal service seem inevitable. The vacation property market is still quite weak.
OBSERVATIONS ABOUT OBSERVATIONS
It’s interesting to note the list of negatives is so short. The markets tanked when the S&P rating agency first downgraded the US credit rating one notch. Since every rating agency is downgrading every country now, the markets are no longer reacting negatively since it doesn’t matter! We’re about the same!
We all know about the problems over in Europe as well as how screwed up our political system is. Therefore, we expect our Congress to do nothing and Europe to fall into the abyss. Since our expectations are so low, any progress will be taken as a positive.
The underlying fundamentals of the economy are definitely improving. Things just seem to be taking way longer than expected. Whatever the case, so long as the direction is correct, we’ll get there.
REBALANCING HISTORY AND NOW
My major rebalances this year was going from 100% equities on Jan 1 down to 30% equities and 70% cash on April 29. The portfolio was up 11% and I wrote an article on Yakezie.com entitled, “Sell In May And Go Away: Stock Rebalancing Time“. I then went 97% cash at the end of October after the markets tanked and came back a little, and on November 25 rebalanced the portfolio to 50% equities, 50% cash.
The reasoning for buying stocks was that the S&P500 was down 7.8% at the time and my portfolio was up 10.5% for a 18.3% outperformance. If the markets rallied, I would significantly lose outperformance. With a 50% allocation in stocks, the markets would have to go down 21% for me to start losing money in the portfolio. On the flip side, the markets would have to rally over 36.6% for me to start underperforming the markets with a 50/50 allocation. But if that’s the case, I don’t mind at all.
A 50% allocation in cash (not bonds) with the rest in equities is pretty conservative. It basically says, “There’s a lot of uncertainty out there and I don’t have much conviction and want to play it safe.” I’m usually 70-85% equities on average and the rest bonds/stocks. I realize I will never get super rich being up just 10-15% a year, but with the 10-year yield at only 2%, I’ve decided that 10% is my hurdle rate of return for practically all asset classes.
When your mother fund starts getting chunky, capital preservation and decreased volatility is what you start to seek. Let’s say you max out your 401K or whatever retirement vehicle you have every year for 20 years. You’ll probably have $500,000-$1,000,000 after performance and company match. The $17,000 a year contribution doesn’t make a big difference anymore because a 10% return on $500,000 is $50,000. If you end up losing 20% one year, that’s $100,000 gone! At a $17,000 a year 401K max contribution, that will take 6 years to make that money back! The more you have, the more careful you need to be with your money.
I believe in stocks for the long term, especially as the world’s largest central banks continue to print money. The real question is whether we can use our ever devaluing cash to buy stocks and real assets quick enough! My gut says that the bull market is not back, and that if we can return 10% in 2012, that will be another home run!
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About the Author: Sam began investing his own money ever since he opened an online brokerage account online in 1995. Sam loved investing so much that he decided to make a career out of investing by spending the next 13 years after college working at Goldman Sachs and Credit Suisse Group. During this time, Sam received his MBA from UC Berkeley with a focus on finance and real estate. He also became Series 7 and Series 63 registered. In 2012, Sam was able to retire at the age of 34 largely due to his investments that now generate roughly $175,000 a year in passive income. He spends time playing tennis, hanging out with family, consulting for leading fintech companies, and writing online to help others achieve financial freedom.
Updated for 2016 and beyond.