USA Today says that stocks are at all-time highs. So is it a good time to sell? Well…probably not.
Let’s take a closer look at our article. Hmm. They say that the large companies are doing well and small companies are doing well, too.
Okay, that’s two market segments. What about the rest? I generally recommend investing in 8 market segments, not 2. Here they are:
Large Cap (large company stocks)
Large Cap Value (large company dividend paying stocks)
Small Cap Value
Short term bonds.
Reason not to sell #1: What happens every year:
Every year, some of these segments go up and do better than the other segments, and some don’t do so well.
So while large cap stocks and small cap stocks did well in 2013, there are other segments that didn’t do so well.
Here’s a chart of the last 15 years. It shows which segments did the best. There are people who can make a ton of money if they can figure out the pattern here. Turns out, which segments outperform the others are pretty much random.
In other words, you can’t predict it. There is no pattern.
Reason not to sell #2: You have to put your money somewhere.
Let’s say that you do want to sell your mutual funds and ETFs that have done so well. Where are you going to invest the money? The money’s got to go somewhere. Since what happens next year can’t be predicted either, you have no way of knowing if you’re going to take money out and invest in something that does well in 2014.
The Solution: Invest in a well-diversified portfolio and rebalance every year
When you rebalance, you sell some of the winners and buy more of the segments that are cheap right now. Research says that rebalancing once a year is about right.
As a financial planner, I try to smooth out the financial roller coaster—to make money into a low-drama part of life. However when the market is at a high, I say—hey, it feels good. Hang on; enjoy it.
Life is inherently paradoxical; when is the opposite of this advice true?
If you own individual stocks, it could be a great time to sell. If you own company stock options, it could be a good time to exercise them.
I don’t generally make predictions. However, I’m going to make one right now. The deficit is going to go down. We might not hear about it because the deficit going down doesn’t cause anxiety or grab headlines.
Why will the deficit go down? Because a lot of workers with stock options will exercise them and pay tax on the income. That was a huge factor in reducing the deficit in the 1990s; I think it will work now, too.