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Should You Cash Out Your Investments Because The Market Is Overvalued?

What To Do With Your Investments In This ‘Overvalued’ Market

There is a whole lot of talk about stocks and other wall street products being overvalued. Quite a few gurus are suggesting that a crash is coming. Though they use words like P/E ratios, overvalued investments and impending correction.

It gets better. Some are saying that the entire US economy is going to crumble in the next couple of years. Either the dollar will be highly devalued or multiple different parts of the economy will crash at the same time.

Gosh, where to start with all this…

I was looking up one of the mutual funds which I invest in, the symbol is VTSAX. It was at around $37 per share before it crashed during the ‘depression’ we had late 2008. The value went down to  $16.61. That’s a hefty drop. Using my hindsight vision should I have seen it coming and sold my funds to hold all cash?

Let’s examine that. Had I known exactly that this was going to happen then yes, it would have been fantastic to sell all my funds at $37/share and have, hypothetically, $500k sitting in all cash. Then, still using those handy hindsight glasses, I would go all in at $16.61 and see my $500k go to over $1mill by 2011. I doubled my money, not bad.

What if I didn’t sell. What if I held my position at $500k in 2008 and continued investing through the depression up until 2011. Well, I probably would have bought around $60k worth of VTSAX @ $16.61/share and doubled that in 2 years up to $120k since that’s how much I invest regularly into this fund with my paychecks. Sadly my initial $500k that I had invested would have taken until 1/2013 to go back up to its original value… but it would have recovered eventually, that’s the point. That ‘depression’ may have been called a depression because it met the technical economic criteria but nothing changed in my lifestyle as a doctor living life in my asset accumulation phase.

So how could you have seen that crash coming? I mean wall street was at an all time high, shouldn’t have been a sign? Well, actually no. Because even in 2006 wall street investments were setting records. Then again, maybe you could have sold then… had you known.

Had you known!

That’s the key here. It is important to stress this. You don’t know when the peak is and you don’t know when the low is. Let’s say you somehow guessed that it was the peak, fine. How would you have known it was the bottom? Maybe because the investments started picking back up? Not quite. VTSAX and many other funds dipped and lost 30% of their value in those turbulent times, then regained for a few days and plummeted even more, all the way down to less than 50% of initial value.

So unless you know exactly when the point before the crash is and when the bottom hits you really won’t benefit from trying to sell/buy at opportune times. The current high we are experiencing could continue another 2 years or it could crash down tomorrow.

So why is it that you even care if you could/couldn’t predict the peak/trough?

I mean sure, the first answer might be “because I want to maximize my profits”. But seriously, that’s a little greedy isn’t it? Investing in mutual funds is one of the safest investments out there, your money already grows somewhere in the 4-6% range without you having to work for it whatsoever. Sure, you are putting up a little risk, no doubt. But you are working and making money which means you won’t be SOL if something happens and it’s a highly calculated risk.

There are investments out there that make more, 8-10% or 15-20%. But these are highly risky investments. Sure, with enough research and time spent overseeing them the risk goes down some but it’s no joke. I could see someone who has saved up enough for their retirement to take anything left over and investing it in such vehicles. But again, you gotta put in some due diligence and you gotta be willing to risk that money.

Let’s play out another scenario. I got $450k or so invested right now as of 2016. If I cash out my investments and position myself in cash equivalent products (money market, savings etc) then I would have $450k minus a slight loss for taxes.

I would then have to twiddle my thumbs until the market crashes before investing again. The problem is that it could start dipping down, like it did recently with the Brexit incident, wall street dropped ~10%. It’s just that my timing would have to be perfect because I totally would have missed that opportunity. It was over in just a few days.

If I wait for the next big one, even if I could anticipate the trough, I would mean keeping my $500k out of the market for 1, 2, 3 or maybe more years until the crash/correction/depression occurs. That’s x-years that I would have missed out on dividend income, dividend reinvestment and a rise in my share value. I would have also lost some value to inflation in that time-frame.

So you see, it’s not as easy as pulling your money out and timing the market just right. I’m not saying that timing is impossible, just that it’s not easy and it takes a lot of expertise/experience.

Speaking of timing the market. Matter of fact, speaking of index funds, mutual funds etc. I use mutual funds to grow my investments because it makes sense to me. It’s easy, low risk and I know what I’m investing in. Is it the best option? Fuck no. Is it the safest option? Nope. Am I being a little lazy? Absolutely.

Index investors, people who choose to invest in low-cost passive mutual funds always repeat the mantra that “you should never try to time the market”. They believe that the best strategy is to buy-and-hold these index funds for the long-run. Did you catch that little duplicity there?

They don’t believe in timing the market but they are timing the market by using a buy-hold strategy. So yes, what I’m trying to say is that it’s all bullshit. Index funds is just another way for wall street to skim a little off the top and make money off you. That said, it makes it quite convenient for us lazy, passive, risk-averse investors.

I want to touch on one more point. Towards the beginning of the post I mentioned that some gurus are predicting the downfall of Rome – well you know, the US. Okay, I get that, yes it will definitely happen because history has taught us that no great power remains the great power forever. But of course we don’t know when that might happen and the reality is that it will probably be a much smoother transition for many of us than what the history books will write in the future.

If the US economy were to go to shit in the next… 5 years, then it really doesn’t matter where you are holding your money. Under the mattress? You’re fucked because the value just went to shit. In a savings account? If it’s a true pandemonium then the banks won’t let you withdraw your money and then inflation will nibble at your savings’ value. Moved it overseas? The world economy is backed by the US dollar so wherever you keep your money you will likely experience a similar drop in its value.

The only way you could probably come out unscathed is if you were able to decouple your life from the monetary system. You have a paid off home, you are growing a lot of your own fruits/veggies/animals and you are able to provide a lot of your own electricity through your solar grid. You probably also have become less reliant on income and automobiles. In which case you probably have a few shotguns and an underground bunker.

Yea, so I’m not telling you to go do that – though honestly I think it’s kinda cool if you can. My point is don’t be too worried about shit that’s completely out of your hands and don’t get greedy.

In summary, try to come up with an investment idea that is widely adopted, that makes sense to you and that you are interested in mastering over the next few decades. Whether it’s mutual funds, individual stocks, currency trading, options, dividend strategies, real estate, business investing or whatever else is out there. My financial adviser uses indexing has his strategy for his clients’ investments and during most of our check-in sessions I learn more and more about this strategy.

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