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!
Now that I review this post on 9/18/2017, I realize that I was way too pessimistic! But at least I did not sell my San Francisco home in 2012 for $1.7M. Instead, I sold it in June 2017 for $2.74M.
San Francisco and Nationwide real estate also reaching all-time highs
RECOMMENDATIONS TO BUILD WEALTH
* Manage Your Finances In One Place: The best way to become financially independent and protect yourself is to get a handle on your finances by signing up with Personal Capital. They are a free online platform which aggregates all your financial accounts in one place so you can see where you can optimize. Before Personal Capital, I had to log into eight different systems to track 25+ difference accounts (brokerage, multiple banks, 401K, etc) to manage my finances. Now, I can just log into Personal Capital to see how my stock accounts are doing and how my net worth is progressing. I can also see how much I’m spending every month.
The best tool is their Portfolio Fee Analyzer which runs your investment portfolio through its software to see what you are paying. I found out I was paying $1,700 a year in portfolio fees I had no idea I was paying! They also recently launched the best Retirement Planning Calculator around, using your real data to run thousands of algorithms to see what your probability is for retirement success. Once you register, simply click the Advisor Tolls and Investing tab on the top right and then click Retirement Planner. There’s no better free tool online to help you track your net worth, minimize investment expenses, and manage your wealth. Why gamble with your future?
Personal Capital’s award-winning retirement planning calculator. Are you on track?
* Invest Your Money Efficiently: Wealthfront, the leading digital wealth advisor, is an excellent choice for those who want the lowest fees and can’t be bothered with actively managing their money themselves once they’ve gone through the discovery process. All you’ll be responsible for is methodically contributing to your investment account over time to build wealth.
In the long run, it is very hard to outperform any index, therefore, the key is to pay the lowest fees possible while being invested in the market. Wealthfront charges $0 in fees for the first $15,000 if you sign up via my link and only 0.25% for any money over $10,000. You don’t even have to fund your account to see the various ETF portfolios they’ll build for you based off your risk-tolerance. Invest your idle money cheaply, instead of letting it lose purchasing power due to inflation.
Click to see see what type of portfolio Wealthfront will create for you based off a simple six question questionnaire
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.
Even as I see all the green in my portfolio, I’m not at all optimistic. Too many problems still lingering. I would use this as a time to “sell” – but at my age – I’ve never sold anything (I’m just buying less).
The good thing about having a smaller portfolio is that you can easily catch up if you underperform with contributions. Also, if you blow yourself up, it’s not a lot of time and money invested either. You can afford to swing for the fences and miss! Time is on your side.
I’ve been using much gentler adjustments. For me the time I spend on my business is still worth a lot more than tweaking a little more return out of my portfolio, and the 6th minute I spend on my investments in a year is probably a losing proposition already. It’s still fun to keep track and make adjustments though.
At the start of the year I thought stocks were a bit above fair value so I had as much as 20% in bonds. But as the prospects for stocks improved with every drop I’m down to a little over 10% in bonds now. I’m shocked and disappointed to find that this morning the main portfolio shows the market value has almost risen back to the book value (which shows how much I’ve put in this year) from a nice discount a week ago. There’s still time for it to go down some more before the next chunk goes in on the 10th.
I’ve never thought that selling in May was generally reliable, but your experience makes me wonder if it’s a trigger when stocks are overvalued already. Someone should do research on that :)
I wrote a post recently analyzing the future expectations for the stock market. If you think the last 20 years were normal then they could rise quickly but if you watch the long-term history instead you can only expect average returns from here.
When I wrote the article in April, it really just coincided with being up 11% after only 4 months. Everybody was, and I thought that to be unsustainable hence the rebalance. Coincidental timing I guess.
How you doing this year with your strategy?
It’s showing a gain of 0.2% on the amount invested (most of which was put in this year).
Not bad considering the short timeframe :)
0.2% is better than a kick in the face! Hope you continue to make money!
I can’t impress people at parties with it yet :) Well I might if they actually knew how much they’ve been losing…
But I’ll take a strong possibility of a high long-term return over the certainty of a moderate short-term return. Your approach is great too because you know what you need and don’t get greedy taking on more risk when you’ve already made enough. Very few people would ever have the discipline to execute that.
I sold some losers yesterday on the big gain day. You timed the market quite nicely Sam. I can’t do that so I stuck with about 80% equity throughout the year.
My 401k didn’t do well at all this year. It is still down about 9% on the year due to all the foreign market fund in there. :(
Our net worth is up about 10% from a year ago though. I guess I can’t complain too much. That’s including all the saving we did this year.
Yeah, the foreign holdings this year have been such a killer compared to the relative stability of the US. They will probably snap back the most in a global rally.
Congrats on your YoY net worth increase. I shoot for 10%+ on NW annual increase myself.
I am bullish about 2012 because it is an election year. If the early signs pan out, next year will be very bullish. Unemployment will be high, but that in itself does not have the same effect on the market. If jobs are created, it trumps the high unemployment. News from Europe seems to be better.
My investment straegy is long term with investments in TIPS, biotech, healthcare, tech and divideend stocks.
Krant, at 65, what is your equity/bonds/cash balance curious to know? I imagine myself being 65% cash and bonds then. Love to understand your allocation thought process.
Thx
Haha, yeah right. Just luck and following my own internal guidelines to take emotion and over thinking out of the equation.
Let’s hope things stick until year end and no more negative surprises!
I would guess performance to be flat as well, since you would have bought in an up 10% market and a down 8% market. The absolute value may be up by the. Amount contributed.
What’s your performance and absolute amount YoY increase?
It is definitely a positive that corporate governance has increased. Should be good for the long term as negative management discounts dissipate potentially and a bigger trust of the markets and companies ensues.
Over/under on S&P +10% in 2012?
Oh, I’m just asking, not betting. The o/u betting line is probably closer to 6%. I think if Ye markets can return another 10% this year, that’s solid.
The only bet I’m taking is that I believe Obama will win in 2012! Get the ProV 1 Titleists!
I am in an unusual situation because I will have Social Security and a pension as guaranteed income. My portfolio is set for growth with a mix of TIPS, dividend stocks/funds, healthcare, biotech, tech, and various other funds and stocks. Currently, my fixed portion is roughly 25% and growing. My target is 50% in the next 5 years. I expect to live in retirement about 25 years.
Sam, we seem to have a similar outlook, semi-bearish. My 401k is about 60% cash or cash equivalent, while even my speculative Scottrade account is about 40% cash.
Cool. I’m actualy bullish, but have already hit my hurdle of 10%, +14.5% so I’m just 50/50 now. This environment is so unpredictable, I can’t warrant more than a 50/50 allocation.
I think the long-term still holds a lot of sideways moving as opposed to true “bear” or “bull” markets. There are sectors that will certainly see growth, but the Western world needs to slowly de-leverage debt at every level, and austerity measures will temper and high growth rates. I think the best-case scenario is that we see true growth in late 2013 or so. As a result of our refusal to regulate any of the ridiculous financial sector, I’m sure we’ll see a lot of volatility along the way (aka “The New Normal).
Hard to argue with that. Maybe we trade in a +10/-10% channel, however, with the November unemployment data of 8.6% coming out today 12/2/11, it sure seems like the fundamentals are finally turning for the positive!
Still a lot of people that stopped looking for work and that are underemployed that don’t factor into that stat, but you’re right, it’s nice to see some good news for a change!
Plus, your multiple bets on Obama for Prez are really looking up!
I’m so tempted to spend the thousands before he wins! lol. Gonna be rich!
I don’t have a punt fund anymore. When I did, I invested in retail stocks but never made any money. …I sure hope the bull market is back. I feel like the economy is doing ok though. Not bad, not great, just ok. Maybe that’s my emotions talking because my manager told me no layoffs this month but no bonuses either!
No layoffs is better than nO bonuses! Buy dePending on what industry you’re in, no bonuses suck!
Great article. Love your disciplined approach. It paid off! Nice week, but still a lot of danger out there. Didn’t sell in May so had to ride through the volatility. Feels like I broke even or down some because of regular contributions. Need to take some time to reassess. Nice job!
My portfolio is pretty bearish at this point. I think that my model has me at 15% bonds and 25% short the market and 60% cash as of the end of November. I have a very systematic approach though, and my thoughts don’t really enter into the equation of where my money goes.
Wow, that’s very bearish! What are the variables in your model that are indicating you take a net short position? Thx
At the heart it is a relative strength model (those areas that have had the best recent performance are invested in) but I also have a market timing aspect and a core/satellite aspect. Basically I have a set of ETFs that are my investing universe, and the best sectors get the most weighting (Long term government bonds recently). There are core ETFs that I invest in at 5% of portfolio levels, and then I could add up to 10% more in related areas. (e.g. I could invest in foreign emerging markets EEM, and if the sector as a whole is doing well, then also invest in the highest performing related areas, maybe Korea and Turkey for a total of 15% in emerging markets). Obviously upderperforming areas don’t get invested in (e.g. Financials recently). I rebalance every month (but update and track weekly).
Sounds good. Is this your mother fund? How has it done this year?
I LOVE your idea of a punt fund. I’m bullish for 2012. However, even if I wasn’t, my investment strategy “sadly” wouldn’t change much. Oh well, yes we’re pretty boring in this respect. Oh well, hopefully the bull markets are back. Cheers!!!
I am keeping an eye on the Eurozone, especially with Italian debt coming due the end of January, 2012. It could go badly, but I’m keeping my fingers crossed. That said, we are continuing our strategy of our 401K being in a fund geared to our age. Since we are retired that is going to be a fairly conservative strategy. We also have some stocks in commodity-related companies as a hedge against inflation. I’ll be happy if the bull is back as it will help that hedge as well as monies in our pension funds.
Wow, that is some variability in your asset allocation. I’m very concerned about Europe. But since I invest for long term I’m keeping a steady asset allocation, maybe upping USA equities a bit.
During the last two days EURO is falling. Are you agree that EU zone is doomed to collapse?