I’ve often heard that stock market investing is little more than gambling. And, given the way some people approach the stock market, this can be true.
Some investors seek genuine, long-term value and do a lot of research before buying. Others—the gamblers—move money around quickly in accordance with trends, momentum, and news flashes.
Both types of investors can make money.
And, regardless which kind of investor you are, some of gambling’s tenets apply. Specifically, for the sake of risk management and conservation, it’s smart to “take some of your winnings off the table” after a good streak, rather than letting the entire windfall ride.
This is why I’m spending time this month doing some international rebalancing. That is, I’m taking funds out of the record-level U.S. equity market… and redeploying them abroad.
Here Are Some Facts About The Current State Of U.S. Markets
I’m not an economist, and I won’t pretend to be. But I can guarantee you this: My ability to see into the future is on par with the best of them.
That is to say, it is nonexistent.
But I am paying attention… in the same way that a gambler might stop and think after winning 10 spins in a row.
U.S. stock markets are far into virgin territory, at all-time record highs, and many IRAs, 401ks, and portfolios have seen the benefit. It’s time to become wary.
Specifically, you should be paying attention to three factors at this stage of our economic cycle…
Recession Timing
- Since the Great Depression, the longest time between recessions has been 10 years (during the 1990s).
- The average time between recessions has been 4.7 years.
- As I write this today, the time since our last recession is 8.4 years… almost twice the average uninterrupted period of prosperity.
By historic measure, we are due for a recession. It could start tomorrow or years from now. There’s no way to know. But a pullback is far more likely today than it was a few years ago.
Interest Rates
During a recession, the Federal Reserve lowers interest rates to help turn things around. If we take a look at history we see that:
- The smallest recession rate cut ever has been around 2%.
- The largest recession rate cut was close to 10%.
- Since the 50s, the average recession interest rate cut has been about 4%.
The problem right now is this: The current Fed rate is just 1.25%. There is simply nowhere to go. Even a rate cut that matches our smallest in history would put us into negative-rate territory.
Stock Price Growth
Since the end of the last recession, stock prices have risen 332% (as measured by the S&P 500). And, perhaps more important, they’re up 166% since the pre-recession peak.
What’s more, stocks today are overpriced, as measured by comparing the S&P 500’s current price-to-earnings ratio against its historic P/E.
Today’s P/E ratio is 25.48, meaning that company stock prices are more than 25 times their earnings. The only time this number has been higher was once during the Dotcom Crash… and then again during the Great Recession. The mean P/E ratio (since 1870) is just 15.6… 39% less than today’s valuation.
What Would You Do In A Card Game?
Picture yourself in a high-stakes card game. You’re on a remarkably long streak and due, statistically, for a bust…
The bust will be particularly hard to recover from… and you’ve doubled or tripled your money in the game so far.
What would you do?
Probably you would not let all your winnings ride on the next hand.
Probably you would take some of your profits off the table.
It’d be the smart thing to do… right?
Likewise, now is the time to skim your gains out of U.S. stock markets.
What should you do with those gains?
I know what I’m doing. I’m diversifying abroad. Specifically, I’m taking profits out of U.S. markets and reinvesting them in property overseas.
This is easily done if you have a normal portfolio. However, even if you have an IRA or a 401k, you can convert these tax-deferred funds into a self-directed plan and then put those dollars to work for you abroad.
As we’ve been discussing lately, the dollar has retracted from its recent record-setting peak values against other currencies worldwide. However, the U.S. dollar remains strong, resulting in a hefty dollar discount for U.S. dollar buyers in key markets.
It’s Not About Predicting Doom… It’s About Preparedness
Make no mistake… I’m not predicting an imminent market crash or major correction. For all I know, the market could continue to soar upwards for another three years… or for another three days.
My strong recommendation right now, though, is to rebalance. Take some of the past eight years’ gains and invest them abroad.
The options for investing in property overseas are almost limitless, and the benefits are enormous. You can put your money to work in a hard asset while achieving a good measure of portfolio diversity… including geopolitical, economic, and currency diversification.
And I would argue that there’s been no better time in our lifetimes to do this than right now.
