Cheat Sheet Q&A: Finding value in a rising stock market:

Cheat Sheet Q&A: Finding value in a rising stock market:

Today's entry: Hi Brian, I've been a student of your investment information for quite awhile. I've been building up my investments in retirement accounts and have even had additional money I've been able to use to invest aside from my IRA and 401k! I know that you've indicated a disciplined approach to selling investments based on why you invest in the first place but what about investing when you don't find good value in the market? I don't want to break the discipline of investing but I also don't want to overpay for new investments with stocks at record highs.

Bottom Line: I totally understand why you feel this way. When you're making new investments but you're having to pay higher prices than the people who invested in the recent past it can feel as though you're not getting good value. But this is about principal - not feelings - so let me drill down for a moment on an important point with another analogy.

A year ago today the average single family home in Palm Beach County was 8.9% less expensive than it is today. That's a difference of around $30,000 on the average single family home. A year ago there were people I heard from that said they didn't want to buy because they were worried about the lofty price of housing, the elections and the future of the economy. Today I occasionally will hear from someone who will suggest that they'll rent rather than buy because the housing market is "over-priced" in their view, mortgage rates are bit higher than they'd been and there's a lot of uncertainty in the future. So let me ask you...

If you could have purchased a year ago but didn't a year ago are you better off today? Of course not right. You'll pay significantly more for the home and slightly higher mortgage rates on your financing. Not to mention that you missed out on the appreciation of the home. So back to stocks.

I can't tell you what specifically will happen with home prices or stock prices over the next year. I can tell you what history has told us:

  • Real-Estate will appreciate by 4.2% on average per year
  • Stocks will appreciate by 10.1% on average per year

So what does that necessarily tell us? That on average if you attempt to time these investments you'll pay more and lose out on the appreciation in the meantime. That's why, aside from major financial planning/life changes (IE divorce, death, retirement) you shouldn't attempt to try to time the markets. Even 80% of the professional investors who attempt to time the market under-perform the market. I'll use the Jim Cramer example I haven't used in awhile. He's both a blessing and a curse from my perspective. The blessing is that he makes investing seem "fun" to many who might not engage otherwise. The greater the participation the better for the average family. The curse of Cramer is that he personally, via his "Action Alerts Plus" portfolio - has under-performed the S&P 500 - meaning that historically you'd be better served by making regular investments to an S&P 500 fund than trading along with Cramer. 

So if you have a plan and it's working - why are you trying to fix it? It's natural to see prices higher than they used to be and think that you missed out. But to coin another saying that Cramer does effectively use - it's not where prices have been but where they're going. Whether it's a home or especially stocks...From any historical perspective the answer is most likely higher. 

If you have a topic or question you'd like me to address email me:

Brian Mudd

Brian Mudd

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