Like most experienced FIRE investors, I don’t see the recent market “correction” as a disaster – I see it as a buying opportunity! The stock market is the only place where people go into despair when things go on sale. Very odd.
I wrote about the potential for a market correction back at the beginning of the year. At that time, the market timing signals laid out by Ben Stein were heavily weighted towards “do not buy additional stocks.” Note that this didn’t say to sell stocks, only that purchasing additional ones at the inflated prices of Jan 2020 was unwise. In this case, it appears the market timing had some validity.
So now that the market has fallen 30%+, I’m interested in potentially changing my current investment allocation, and purchasing more stock now that it has fallen, and reduce my new investments in bonds. Again, the idea is not to sell your current investments, but to guide you on what to purchase going forward. So what do the tea leaves of market timing say?
If you remember there were four categories of the timing:
- Price (Current price of S&P500 vs 15 year trend): For March 17th the S&P500 was at 2,529 vs. a 15-year average of 2,030. The signal is that stocks are still too high, so NO to new stock investments
- P/E Ratio (Current S&P 500 P/E ratio vs 15-year trend): For March 17th, the assumed P&E was 19.03 vs. a 15-year average of 23.4. Since the current P/E is lower, this signal says Yes to new stock purchases
- Dividend yield of S&P500 vs 15-year average: For Feb 2019, the dividend yield was 1.97% vs. a 15-year average of 2.05%, so this signal says No to new stock investments
- Earnings of S&P500 vs. AAA corporate bond (stock earnings “yield” vs. yield of AAA bonds): For March 17th, the P/E ratio is 19.03, or the equivalent of a 5.25% yield (1/19.03) vs. a current AAA bond yield of 2.94% – thus the stocks are providing a better earnings yield than AAA corporate bonds. This signal says Yes to new stock purchases.
So we are 50/50 on the potential for new stock purchases. It appears the signal is saying that stocks still may be overpriced, even after a 30%+ sell off.
So what to do? I was originally thinking of changing my new investment allocations and going for a 100% stock purchases for new 401K and brokerage account purchases. Now that I’ve run the numbers, I think I’ll stick with my current allocation, and just go with that.
Also, if you remember, I changed my income account from a 25% stock, 25% REIT and 50% bond allocation to a 50% stock/50% REIT allocation – just in time to get hit with this massive sell off. This decision was a completely emotional decision, not based on a lot of analysis. So I’m not very confident in my ability to make decisions without firm analysis and numbers – my emotions seem to be 100% off.
So I’ll keep my current investment allocations (30% bonds, 17.5% REITs, 52.5% stocks in S&P500, small cap and foreign). I believe the market will recover one we get this Corona/Wuhan Flu out of our system.
Retirement Manifesto: Benefits of a Bear Market
Hopefully you are all weathering the storm alright!
Mr. 39 Months