I have written several times about the potential of timing the market, using a variety of methods. My favorite approach would be the one Ben Stein and Phil DeMuth came up with after the dot.Com blowup in 2000. I even went back and charted how I would have done if I had followed their advice since I had graduated (back in 1986 – yep, I’m an old man).
For a lot of folks, the giant returns of 2019 were a godsend after having suffered a downturn in 2018. It helped plump back up everyone’s retirement accounts and personal savings, and better place them for retiring early. Yet now there is that nagging fear that we’ll have a correction, and we will lose all those wonderful gains that we had. This also raises the specter of “sequence of return risk,” where you retire right as the market tanks (or stays flat for a decade+). So what is a person to do?
I looked at my “market timing” stats for 2019 and 2020 and here is what they said:
- Price (Current price of S&P500 vs 15 year trend): Jan 2019: No to stocks, Jan 2020: No to stocks
- P/E Ratio (Current S&P 500 P/E ratio vs 15-year trend): Jan 2019: Yes to stocks, Jan 2020: No to stocks
- Dividend yield of S&P500 vs 15-year average: Jan 2019: Yes to stocks, Jan 2020: No to stocks
- Earnings of S&P500 vs. AAA corporate bond (stock earnings “yield” vs. yield of AAA bonds): Jan 2019: Yes to stocks, Jan 2020: Yes to stocks
So in Jan 2019, 3 of the 4 indicators said to purchase stocks, while in Jan 2020, 3 of the 4 are saying invest in bonds. Looks to me like stocks aren’t set up to do great in 2020.
Now remember, these timing stats did not say to sell your stocks/bonds, they just say that for that period, you just concentrate your new purchases on the appropriate category.
As I’ve stated before, I’m a firm believer in the “buy and hold” strategy, keeping with your market allocation, and rebalancing regularly (for me every 6 months) in order to keep your allocation within your guidelines. While some folks may have enjoyed higher returns over a set period of time, this method has met my objectives and allowed me to grow my net worth significantly.
So will there be a correction in 2020? In almost every election year, the market has done OK (with the exception of 2008, when it melted down spectacularly). However, I’ve been growing my net worth at an average of 6.1% per year for the last 14 years – and based on that I would need my investments to lose 9.5% in 2020 in order to maintain that 6.1% growth rate. Take of that, what you will.
My thought is that 2020 will be a “net 0” year, with limited gains in the market. Stocks are overpriced if you look at the metrics above, so it will take them some time for the profits to catch up with the price. My intention is to “stick with the plan” of investing regularly, keeping my allocation, and rebalancing.
What are you plans for 2020?
Mr. 39 Months