Back two years ago, I reviewed Ben Stein’s & Phil DeMuth’s book “Yes You can time the Market” in which they discussed ways to time the market over the long term, using various signals signs to determine the long term (15 year trend) of the market. They definitely did not believe in short-term timing, but they did present a good case for how to look at the current state and make long-term determinations.
I followed up with several other posts in which I looked at short-term timing, and at what Stein/DeMuth’s strategy would have resulted if I had followed it since graduating college in 1986 (answer, I would have been 5% – 10% richer over a 30 year period, including the dot.com crash).
I thought I’d provide a slight update to folks in case they were interested.
If you remember, Stein/DeMuth had four key measurements to determine the long-term direction of the market:
- Price vs 15-year average
- Price-to-earnings ratio vs. 15-year average
- Dividend yield vs. 15-year average
- Bond yeld vs Dividend yield
For Jan 1, 2018, the numbers showed:
- Price (adjusted for inflation) of $2,883 vs 15 year avg of $1,789 – don’t buy stock
- P/E ratio: 24.97 vs 15-year average of 23.2 – don’t buy stock
- Dividend Yield: 1.83% vs. 15-year average of 1.99% – don’t buy stock
- Earnings Yield (inverse of P/E) vs. AAA bond yield: 4.0% vs 3.5% – buy stock
So three out of the four metrics said don’t buy. The S&P 500 for 2018 was down -6.2% (source CNBC). A lot of folks paid money for stocks that were overpriced at the beginning of 2018.
So what did Jan 2019 look like?
- Price (adjusted for inflation) of $2,654 vs 15 year avg of $1,862 – don’t buy stock
- P/E ratio: 19.6 vs 15-year average of 23.0 – Buy Stock
- Dividend Yield: 2.14% vs. 15-year average of 2.03% – Buy Stock
- Earnings Yield (inverse of P/E) vs. AAA bond yield: 5.1% vs 3.98% – Buy Stock
So three out of the four metrics say “buy stocks” – and the market is up 15.23% year-to-date
Does this prove that Ben Stein and Phil DeMuth’s market timing strategy is still valid. It appears to be still going well.
Anybody out there with an interesting market timing strategy?
Mr. 39 months
Boy, do I have a boring life. ….
Actually, since I enjoy the financial side of life, and like doing math, I do get some happiness from this. For those unclear on the concept, rebalancing is where you look at your current investments and compare them to the asset allocation (the split of where you have invested your money) and see if they are significantly different. If they are, then you sell some assets and buy others in order to bring them back into alignment with your goals. You will be “selling high and buying low” which is the goal when investing.
Typically, you do this annually, or semi-annually (like I do every Jan and July). If you did it more frequently, you’d drive yourself nuts, and not gain much in the process. I usually look at my allocation, and see if something is more than 2% off from it is supposed to be (i.e. if my allocation is 17.5%, and its 18.3%, I tend to leave it, but if its 20.%, I’d sell part of it and buy something else). If you remember my previous posts on this from Jan 2018 and July 2018, there is a specific process I go through.
With this year, the regular stocks and international stocks have really suffered in comparison to the bonds (and somewhat to my REITS). My standard allocation is:
- 30% Index Bond funds
- 17.5% S&P 500 Index
- 17.5% Small cap Index
- 17.5% International stocks index
- 17.5% REITs index
This month I’ve found myself selling bonds (and some REITS) and buying stocks, especially international stock funds (which got hammered in 2018). Fortunately, the companies that we use (Vanguard, TRowePrice, etc.) make it relatively easy to do this, so I was able to do my calculations, and then make the moves on the computer for everything within 30 minutes. Again, as a finance geek, I enjoyed the process.
Lately I’ve been considering changing my allocation somewhat, to 20% for S&P500 and small cap, and 15% for REITs and International. We’ll see in February if I act on this.
Hopefully you are considering rebalancing, so you can “buy low and sell high” yourselves.
Have a great 2019!
Mr. 30 Months
Wow, you go away for a week and the market goes nuts. Down an unprecedented 600 points the day before Christmas? Up 1,000 points the day after Christmas? What is going on?
In my opinion, the market is still unsure of where the economy is going to go in 2019, and there are a lot of scared people running out of the market right now, trying to find safety. This is forcing mutual funds to sell at a prodigious rate, often times having to sell their winners in order to generate sufficient funds. It’s almost a self-perpetuating drop, as each new drop pulls the next group after it. The overall drop was around 20% from the market high, which brought us into “bear” territory. Time to panic and sell?
The problem is, as was just demonstrated with today’s 1,000 point jump, you not only have to get out before it drops and you have to get back in before it starts going back up again! Or you can do what so many good investors do, and don’t worry about it.
Stick to your plan. Invest regularly. Dollar Cost Average. Diversify. Take advantage when folks panic and sell at bargain basement prices to pick up some deals. The mutual funds that folks have shed will be there, ready to jump back up again shortly.
In a previous posting, I talked about the P/E ratio. The P/E ratio had dropped down on Dec 24th to 18.03 – still higher than its mean of 15.73. This was back below its Jan 2014 number. Still higher than its mean though, so we could have more to go before we get back to an average market.
I still have over 18 months to go before I hit my FIRE date. The typical market downturn is 12-24 months, which is why they tell you to have 1-2 years in savings bucket, to weather that storm. So I intend to stay with the plan, and keep investing.
How about you?
Other Bloggers on the topic:
Mr. 39 Months
I think this post is going to be similar to a lot of FIRE posts in early November. The stock market, bond market, and every other market in the US got crushed near the end of October, and almost everything went down. Ouch!
Retirement Accounts: Remember, my allocation for these is:
- 30% Bond Index Fund
- 17.5% S&P500 Index Fund
- 17.5% International Index Fund
- 17.5% Small Cap Index Fund
- 17.5% REIT Index Fund
So for the month, I’m down about 5.5%, with the big losers being the S&P500, Small Cap and International . My Bonds and REITs were down , but not as much.
- S&P500: -7%
- Small Cap: -10%
- International: -8%
- Bonds: -1%
- REITs: -2%
My 401K/Deferred account at work is down even more, -7.6%. This is primarily due to it not having a REIT option, so since it is heavier with stocks, it suffered more.
Dividend Income Account: Allocation:
- 25% Dividend Stocks
- 25% REITs
- 50% Bond Index Funds
This account didn’t suffer as much. Part of that is its high weight in bonds & REITs (which didn’t suffer as much) and part of it is that the stock picks, especially Verizon, actually were up. Overall, its only down -2.8%
Value Investing Account: Allocation (remember I refocused this at the beginning of February):
- 40% in individual value stocks I picked myself (2 each, 20% for each) – SBS and GILD
- 20% USAA Market Index (my brokerage is USAA)
- 40% in Vanguard Value Index fund
Gilead was down -11.7%, USAA was down 9.8%, and Vanguard value was down 5%. Surprisingly, Cia Saneamento (which has done terribly for the entire year) was up 25.8%! Very odd.
So what do you do after such a shellacking? I stay the course. For 2017, I had a tremendous year (the market was up 19%), so I got to reap the benefits of that. Now in 2018, with rising interest rates and the FANG stocks of the S&P getting hammered, it looks like its going to be a null year. You have to be willing to take the good with the bad.
How did you do in October?
Mr. 39 Months
A spooky time to all!
Good article about the FIRE movement, with some examples. They’ve got most of it right, a few details off.
The examples they use is your typical high-income earning couple who made six figures in their early years. I wish we could see more examples of more normal people who do this in these sort of articles.
The article ends with recommended steps, which folks in the FIRE movement can get behind:
To get on the road to Financial Independence, Retire Early, proponents recommend these nine steps:
1. Determine why you want to achieve FIRE, and envision what you will do once you get there. (This will keep you motivated.)
2. Calculate your net worth (total assets minus liabilities) to see where you stand.
3. Track every dollar spent so you know where your money goes.
4. Slash expenses. To reach a savings rate of 50% or more, you’ll need to cut major expenses, including housing and transportation.
5. Pay off high-cost debt, such as credit cards.
6. Build an emergency fund so you don’t resort to credit cards in a pinch.
7. Take advantage of tax-friendly accounts: 401(k)s, IRAs and a health savings account.
8. Use index funds to keep investing costs low.
9. Find a side hustle to bring in extra income and boost savings.
Check it out!
Labor Day, the first Monday in September, is a creation of the labor movement and is dedicated to the social and economic achievements of American workers. It constitutes a yearly national tribute to the contributions workers have made to the strength, prosperity, and well-being of our country.
The first governmental recognition came through municipal ordinances passed in 1885 and 1886. From these, a movement developed to secure state legislation. The first state bill was introduced into the New York legislature, but the first to become law was passed by Oregon on February 21, 1887. During 1887 four more states — Colorado, Massachusetts, New Jersey, and New York — created the Labor Day holiday by legislative enactment. By the end of the decade Connecticut, Nebraska, and Pennsylvania had followed suit. By 1894, 23 more states had adopted the holiday, and on June 28, 1884, Congress passed an act making the first Monday in September of each year a legal holiday in the District of Columbia and the territories.
From US Debt of Labor website
Labor Day is often celebrated as the last day of summer. Many companies change company policy (dress codes, work hours, etc.) after Labor Day. For many places, kids go back to school after Labor Day (after enjoying their summers off). There is a fashion rule that says you never where white after Labor Day. All of these point to the same thing; the day is a transition time, between one parts of the annual cycle to another.
Like many times of change in your life, folks tend to want to experience it with family and close friends. It’s a time of barbeques, picnics, and dinner conversation. Sometimes the conversations are serious, but most of the times the talk is light and enjoyable.
This week Mrs. 39 Months and I are traveling north to New York to spend time with her family (hence the rest area picture). Her sister is closing in on retirement, and since the two of them are very close, where she ends up relocating (she doesn’t plan to stay in NY) will have some impact on our plans.
I hope all of you have a pleasant and enjoyable weekend!
Mr. 39 Months
Good advice on how to prepare, especially if you are close to, or have, retired early.