Q&A: Stock markets are at all time highs … should we sell?

Now that the Dow has hit 20,000, we should seriously get out and put the cash under the mattress … don’t you think?

This time it was the Dow’s recent high-water mark. In the past, it’s been the same question in various forms, all of which could be rephrased to this question behind the question: Should the all-time nominal stock market highs be used as some sort of signal to reduce equity holdings?

Or conversely, should it be used as a rationale for holding onto cash balances or deferring new equity purchases (which, in my experience, is an even more common form of market-timing)?

It is human nature to look for shortcuts and/or ways to simplify complex questions. The fact that people predict outcomes by making up stories is what makes us all … humans.

Timing the markets when they’re at all-time highs is a nice, neat and simple story. Unfortunately it’s a fable; it doesn’t work. To use a “baseball story,”  three strikes and you are out.

One.

I can point a couple of my past posts here and here for frowning on these sorts of signals, or treating them as anything other than the noisy blips they are on your financial radar screen. Try to chase them, and you’re more likely to be left flying blind.

Two.

Nominal levels ignore market valuations. That means new market highs may be fun, but they’ve not been worth beans for predicting future returns. Those are expected either way, but for entirely different reasons.

Three.

To take a deeper dive into the subject, Dimensional Fund Advisors has done the heavy lifting for us in “New Market Highs and Positive Expected Returns.”Their conclusion is that it doesn’t work. Give it a read if you want all of the details.

Still not convinced? … then please contact me.