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Here's a question for the masses...

...if you were sitting on a, for example, 70% gain on SPY or VOO and lived in a high tax state where $100 of sold S&P 500 would result in $75 net, would you start seriously considering a sale to free up some cash and hunker down for the inevitable reversion?

This one has sure been itching me lately as I hate giving up 25% with a 100% chance to avoid giving up 50% with a (say) 20% chance each year for the next 5 years.

Thoughts?

where $100 of sold S&P 500 would result in $75 net, would you start seriously considering a sale to free up some cash and hunker down for the inevitable reversion?

Thoughts?


This discussion always comes up when a 5%-10% correction occurs. People get faked out and miss out on the following rise up. Pull up a 5 year or 10 year chart on SPY (logarithmic scale) and eyeball all the dips and ensuing rise.
Drawdowns shake out the weak hands.

“Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves.” – Peter Lynch

That $100 of SPY might well be $125 or $150 before the reversion comes.

Sure, one of these days it will keep going down. Eventually that will happen.

If you really want to bail out without getting itchy every time it hits a bump, look at something like the 200 day moving average.
One of the benefits of using a mechanical indicator is that it removes your emotions from the decision.


where $100 of sold S&P 500 would result in $75 net after taxes.

It might help if you thought of that $100 belonging $75 to you and $25 to the government. That $25 was never yours, it was just you holding it on behalf of the government.

This discussion always comes up when a 5%-10% correction occurs. People get faked out and miss out on the following rise up. Pull up a 5 year or 10 year chart on SPY (logarithmic scale) and eyeball all the dips and ensuing rise.
Drawdowns shake out the weak hands....

Though not technically wrong, this does also sound like precisely the sort of thing you hear near the top of a secular bull market.

A 5 or 10 or even 15 year chart doesn't tell you much, since that entire stretch (with the shortest big bear dip in ages in 2020) has been basically one bull market.

Using my smoothed real earnings yields (not comparable with other people's, but same idea):
Current level is 2.618%, like a CAPE of 38.2
5 years ago was 2.790%, like a CAPE of 35.8
10 years ago was 4.322%, like a CAPE of 23.1
15 years ago was 5.205%, like a CAPE of 19.2

Smoothed real earnings have really soared in this stretch, but even using the contemporary earnings at each point as I did, 15 years ago the market was only half as richly valued as today.

So I wouldn't want to extrapolate this kind of multiple expansion, and I wouldn't want to take any lessons from how well buying the dips has worked lately. This trend of rising multiples is definitely going to halt at some point, and I think it's very likely that it will go into reverse for a while. I have no idea how to predict when that might start or how much valuation levels might fall, but if valuation levels can double on trend for 15 years then a halving that takes that long seems hard to rule out as a theoretical possibility.

Sitting on cash takes discipline, but it doesn't necessarily mean you lose out. Imagine somebody who sold "way way too early" when Mr Greenspan gave his famous speech about irrational exuberance in December 1996, and sat in cash missing out on the party through the market top in early 2000. What gains that person gave up! But that person could have bought back in at lower valuation levels than where they sold (higher trend earnings yields) for in 2001, and virtually any time 2002-2017, more than 20 years later. The S&P 500 real total return from the 2000 market top was negative without exception until May 2013.

For me, the lesson from that (having lived through it as an investor) is that buy and hold is not a good strategy starting from a nosebleed valuation level. That being said, I admit it can make some sense strategically to ride it up so long as it is clearly continuing: until there are no longer signs that the bull is still underway. (there are definitely still signs at the moment, with fresh market highs just a few days old).

One view of any market: all price increases which are faster than value increases are ultimately transient, within rounding error. So the extra gains you see during those stretches are always going to go away unless you sell while they're still high.

Jim

... thank you both, and to be abundantly clear, my post was not in reaction to the market movement today or yesterday. I was a young lad during that 99-01 era, but I do remember it and how wild it felt along the way. My reaction is to earnings yields relative to bond yields feeling exceptionally low. My reaction is also to hyper concentration in a select group of stocks that are generating tons of value per dollar of earnings and yet may not be able to meet market expectations in the coming years.

I have a high class problem of a fair bit of S&P in taxable accounts with a decent gain and I would sure love to 'swap it' for some Berkshire or cash if there weren't a huge tax hit.

I've been burning a lot of cycles comparing an immediate 25% hit versus a "can't know when but sure seems likely" 50% hit.

it can make some sense strategically to ride it up so long as it is clearly continuing: until there are no longer signs that the bull is still underway.

That's why watching something like the 200 day SMA of the s&P500 is a reasonable thing to do.
A clear sign that the bull market is over is that it is going down long(ish)-term. Long average to smooth over short-term irregularity.


So the extra gains you see during those stretches are always going to go away unless you sell while they're still high.

Ditto.

Way back 'round about, I think, 2010-2013 we had a very long debate/discussion related to this.
One side was all "Who can stand seeing their portfolio cut in half? It wouldn't have happened in [this here strategy]"

The other side was all "Okay, sure, [my favored strategy] got cut in half down to $500,000. I lost half a mill. Your strategy only lost 10%, from $100,000 down to $90,000. Last time I checked $500 is more than $90."

Of course, that doesn't help if you started investing shortly below the peak.

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