There was an article in Barron’s over the weekend that caught my eye and then it was brought up this morning on Worldwide Exchange with Brian Sullivan. I had a post about stock splits outlined and ready to write, but this motivated me to change courses. The article was titled “It’s Time to Build Cash to Take Advantage of Stocks’ Coming Tumble”. The title makes it sound so easy to time the market. If you actually read the article, the title is somewhat misleading. There is some interesting data in there that I’ll touch on, but the article does not recommend selling everything as the headline insinuates.
The article points out that last Thursday marked the 100-day anniversary of the market low on March 23rd. The rally of over 50% from those lows in the face of terrible economic news and poor sentiment has taken the market to lofty levels. Despite that, the article points out that in 17 out of 18 large 100 day rallies, the market was higher one year later.
The article touches on the stock splits that I was going to write about this morning and essentially concludes that there is some irrational exuberance in the market, particularly in the tech space. Rather than calling for a full move to cash as some would expect from the title, it calls more for a shift from the overbought tech names to some of the cyclical names that are still beaten down. Furthermore, it challenges investors to consider how they would react to a 10 or 15 percent correction in the market.
So, what should an investor do? Well, it is always worth a discussion with your advisor if you’re working with one. If you’re not, it is definitely a good time to evaluate the risk in your portfolio. That will help you get a feel for where you stand and how different market events can potentially impact your portfolio. Rather than trying to make a bold call like moving everything to cash, the more prudent way to handle it would be to determine how much risk you are taking and make sure you are comfortable with it.
Whether it is the election, the virus or some news event that we’re not yet talking about, the market will eventually experience a correction. No matter where we are in the cycle, there is usually uncertainty and concern over market valuations. There will always be temptation to sell and get back in after. The title of this article makes it sound like this is something anyone can do regularly. Sell now and buy back after the “tumble”. Who will tell you when it is over? How will you know? What if the “tumble” never happens? Rather than trying to answer these questions, you’ll be much better off by taking a long-term view and focusing on your financial plan. I know it may be less exciting, but the slow, steady, diversified approach should prevail in the long run.