I've been worried about stock prices for months — and now I'm putting (some) money where my mouth is
As regular viewers know, for the past 17 months I have been worrying out loud about US stock prices. Specifically, I have suggested that a decline of 30% to 50% would not be a surprise.
I haven't predicted a crash. I also haven't made a timing call. But I do think stocks will deliver returns that are way below average for the next seven to 10 years.
So far these concerns have just made me sound like Chicken Little. The S&P 500 is up strongly from where I first worried allowed.
That's actually good for me, because I own stocks. And, for the reasons I describe below, I'm still not selling them. But my concerns haven't changed. In fact, as stocks continue to rise, my worries continue to increase. I've described them in detail below, too.
And now, for the first time, I am putting (some) money where my mouth is!
A few weeks ago, I changed the "dividend reinvestment" policy on my S&P 500 fund. (I own index funds — I think stock-picking is generally a lousy strategy for individuals). Specifically, I stopped reinvesting dividends.
I'm a long-term investor, so I don't care what stocks do next. This dividend change is a bet that, at some point in the future, I will be able to reinvest the cash from these dividends in stocks at lower prices than today. If stock prices never fall below today's level, this will cost me money. It will also make me feel dumb for (sort of) trying to time the market.
But at some point you've got to put some money behind your analysis.
And the conclusion of my analysis is:
1) stocks are extremely expensive on cyclically adjusted measures and will eventually revert toward historical means, probably via a sharp correction
2) long-term stock returns from today's level will be about 2% per year — nothing to write home about
So if I think there's risk of a crash, why don't I just sell everything? For the reasons outlined below. The advantage of changing dividend reinvestment instead of selling stocks is that it won't trigger capital-gains taxes. I don't care if the stocks I own tank, as long as they don't tank permanently. A crash will just give me a chance to buy more at lower prices.
To be clear: I have no idea what the market will do over the near term. But there are two reasons I think long-term stock performance will be lousy:
- Stocks are very expensive on almost all historically predictive measures
- The Fed is now tightening
Below, I'll discuss those concerns one at a time.
Before I do, though, a quick note: Sometimes people are confused by my still owning stocks while getting increasingly worried about a sharp price decline. So here's why I don't sell:
I'm a long-term investor (horizon of 10-plus years);
I'm a taxable investor, which means that if I sell now, I have to pay taxes on gains;
I don't know for sure what the market will do (no one knows for sure, and the bulls might be right);
I think timing the market is a dumb strategy;
I'm mentally prepared for a sharp decline (I won't get spooked into selling if stocks crash — on the contrary, I'll buy more);
I think stocks will eventually recover from a crash; and
There's nothing else I want to invest in (every other major asset class is also priced so high that they'll all most likely deliver lousy returns)
Yes, if stocks drop 50%, and then we enter a Japan-like scenario in which they continue to drop for two decades, I'll feel like an idiot (and poor). But otherwise, I'm okay with sharp price declines. I'm a long-term bull on capitalism and the USA. And crashes create the opportunity to buy stocks with much higher likely future returns.
You can read more on my stock-market concerns here.
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