So far, this year has been great for investors in stocks and shares. As I write, the FTSE 100 index stands at 7,269.11 points, having hit its 2021 high of 7,281.17 yesterday morning. Meanwhile, the US S&P 500 index keeps on hitting record highs. Right now, it hovers around 4,591.91 points, having hit an all-time high of 4,598.53 earlier in Tuesday’s session. But as share prices and company valuations surge ever higher, stock markets often become increasingly fragile. So, with my family’s money largely invested in stocks, is it time for me to sell up and sit on the sidelines?
If I were to ask financial advisers whether to pull our money out of stocks, I know the answer I’d get. It’s very much in their interest to encourage people to invest more, so they’re highly unlikely to suggest the very opposite. Furthermore, financial pundits usually argue that timing the market — by selling high-priced stocks — is very difficult, if not impossible. But for me, it’s not so much about timing the market as keeping an eye on markets and doing what I feel is right, given the circumstances.
Market timing is very tough
Following the UK’s referendum vote to leave the European Union in June 2016, my wife and I discussed the consequences of this important event. We both predicted disruption and volatility in the aftermath of the Brexit ballot and decided this made UK shares much less attractive to own. Hence, we sold out of UK shares and reinvested the proceeds in US stocks. Following the wise advice of billionaire investment guru Warren Buffett, we were betting on America. This asset-allocation decision proved to be lucrative. Since the Brexit vote on 23 June 2016, the FTSE 100 index has gained just over 930 points. That’s an increase of 14.7%. Meanwhile, the S&P 500 has more than doubled, rising 117.3% over the same period. Wow.
My second bout of market timing came in late 2019, when my wife and I agreed that US stocks were looking historically pricey. As a result, we sold stocks and moved half (50%) of our portfolio into cash. We did this in anticipation of a market decline within the next year. Within months, Covid-19 went global and stock markets worldwide collapsed. Within days of ‘Meltdown Monday’ (23 March 2020), our 50% cash was once again invested in US stocks. Since its 2020 closing low of 2,237.40 points, the S&P 500 has more than doubled, soaring by 105.2%. Again, we’re very pleased with our decision to sell stocks, only to buy them back much cheaper months later.
Should I sell up today?
Recently, I’ve been warning my wife that, as the US market hits new heights, valuations look increasingly stretched. Right now, the S&P 500 trades on a price-to-earnings ratio of 30.5 and an earnings yield below 3.3%. What’s more, the index’s dividend yield is a mere 1.3% a year. These are some of the worst fundamentals I’ve seen in 35 years of investing (with the exception of the top of the dotcom boom in 2000).
On most market valuations, US stocks are strongly over-valued. Hence, with fundamentals this unattractive, we’re not increasing our exposure to the US. Then again, with the FTSE 100 looking undervalued in both historical and and geographical terms, we’re increasing our holdings of cheap UK shares. In short, we’re putting our money where we think it stands the best chance of making decent returns. For me, that market is cheap FTSE 100 stocks!