5 Reasons I’m (Partially) Dumping Stocks Now

(Editor’s note: This story was written on July 30, 2019, one day prior to the Federal Reserve rate cut, several days before President Trump’s threat of additional China tariffs and nearly a week before today’s 760-point decline in the Dow Jones industrial average.)

Welcome to the “2-Minute Money Manager,” a short video feature answering money questions submitted by readers and viewers.

Today’s question is about stocks, specifically, whether it’s a good idea to take profits when you think the market might drop.

Watch the following video, and you’ll pick up some valuable info. Or, if you prefer, scroll down to read what I said.

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Don’t want to watch? Here’s what I said in the video

Hello, and welcome to your “2-Minute Money Manager.” I’m your host, Stacy Johnson, and this answer is brought to you by Money Talks News, serving up the best in personal finance news and advice since 1991.

Today’s question comes from Jayne:

“I’ve made a lot of money in stocks over the last several years, and now I’m afraid of losing it if the market drops. Are you selling?”

I’ve been investing in stocks for about 40 years, including 10 years as a Wall Street investment adviser. I’m not a market timer, and I plan on owning stocks as long as I draw breath.

That being said, I’ve recently started taking some money off the table.

Here are five reasons why:

1. Trees don’t grow to the sky

In 2009, when the Dow was about 7,000, I bought a basket of stocks. Not because I’m a genius, but because having lived through several recessions, I’ve learned the time to buy is when everyone is freaking out. And they were definitely freaking out in March of 2009.

I simply figured that sometime between those dismal days and the time I retired, the market would make a comeback. And I was right.

As I speak, the Dow is at 27,000: nearly four times higher than it was back in 2009. I haven’t quadrupled the money I put into stocks back then, but I have done well.

Stocks today are no longer cheap. The average stock price/earnings ratio over the last hundred years is about 15, meaning stocks are typically priced at about 15 times their earnings per share. That ratio is now 22. It’s been worse, but however you slice it, stocks today are more overpriced than underpriced.

In addition, we’re now in the longest economic expansion the nation has ever seen. While it’s certainly possible for the party to continue, we’re definitely closer to the end than the beginning.

Bloomberg recently reported, “The S&P 500 Index is now trading near its fair value, with limited further upside,” citing Goldman Sachs.

Morgan Stanley agrees. Barron’s reports:

“Morgan Stanley strategist Andrew Sheets doesn’t see much upside in stocks these days, resulting in his decision to cut the firm’s allocation on global equities to underweight from equal-weight.”

Seems reasonable to me.

2. I’m overweight

I actually could stand to lose a few pounds, but what I’m referring to is the weighting of stocks in my overall investment mix.

Because stocks have grown in value so much over the past decade, I now have a big percentage of my long-term savings there. My mix is out of whack.

This is a time when everyone should look at their investments and at least consider rebalancing so you don’t have too much in stocks. Don’t wait until the market does it for you.

3. I’m not getting any younger

I preach a simple rule of thumb for determining the percentage of long-term savings that belong in stocks: Subtract your age from 100. If you’re 40, you should have about 60% in stocks. If you’re 63, like I am, you’d have 37% in stocks.

To be honest, I’m not going to reduce my stock percentage to the level my age would suggest. After all, it’s just a rule of thumb. But as you get older and your opportunity to make back what you lose diminishes, the temptation to take some chips off the table grows.

As I said in an article last year:

“If I was 25 years old, I wouldn’t do a thing, even if I was sure there was a recession on the horizon. Our economy always goes up and down, and the market along with it. I learned long ago not to try to time it. The thing is, however, I’m closer to 65 than 25, so I’m getting more concerned with the return of my money than on my money.”

In short, I’ve made a lot over the last 10 years, and I don’t want to give it all back during the next recession. That’s why I’m taking some chips off the table. If the market keeps going up, that’s cool. I’ve still got significant skin in the game.

4. Voodoo economics

I’m no professor, but I know “voodoo” economics when I see it.

Case in point? With the economy at nearly full employment and the stock market at record highs, the Federal Reserve has begun to lower interest rates.

Historically, the Fed uses rate cuts to stimulate a weak economy, not goose a healthy one. When the good times roll, the Fed traditionally “normalizes” rates, meaning it raises them, both to keep the economy from overheating and so they’ll have ammunition to stimulate the economy by lowering rates when times get tough.

At least, that’s the way it used to be. These days we have a president who’s taking credit for “the fact that our economy is the best it has ever been” while also berating the Fed for not lowering interest rates.

In my experience, these things don’t go together. If the economy is good, the Fed, which is supposed to be independent of the White House, shouldn’t be lowering rates. And yet that seems to be the case.

From Marketwatch:

“It’s a rookie mistake by Fed Chair Jerome Powell, who’s been bullied by President [Donald] Trump and financial markets into pumping more liquidity into an economy that already has plenty. And don’t think for a second that Powell’s tormentors will be satisfied with just one quarter-point cut.”

Bottom line? If the Fed is lowering rates because they see a potential recession ahead, that’s a bad sign. If they’re lowering them when they shouldn’t because of Trump’s bullying, that’s also a bad sign, at least in the long run.

5. Trade wars aren’t good or easy to win

In March of 2018, the president famously tweeted, “Trade wars are good, and easy to win.”

False. By just about anyone’s estimation, trade wars have a negative effect on the global economy.

Trump has also suggested multiple times that China is paying the tariffs he imposed on $250 billion of Chinese imports, while America reaps the benefits.

Also false. A tariff is a tax. Think of it as you would a sales tax, except it’s up to 25%. When an American company buys Chinese products affected by the tariff, they’re paying that tax, which obviously increases their cost. They then have two choices: Eat the additional cost and make less money, or pass the cost along to their customers, and as a result, sell fewer units. Neither is good for stocks.

Reuters reported in June:

“A wide range of companies this week have told government officials at hearings in Washington that they have few alternatives other than China for producing clothing, electronics and other consumer goods. They have said alternatives would cost more, and that the next round of tariffs could wipe out profits and cost jobs.”

Of course, the trade war could end tomorrow with the stroke of a pen, which would certainly send stocks higher. While that’s a possibility, however, imagine for a moment you’re China. You know your antagonist is up for election next year. Would you roll over now, or wait to see if he gets replaced?

The bottom line

Timing the market is a fool’s game and not something I’d ever advise. That being said, however, now and then circumstances dictate taking decisive action. One of those times for me was March 2009, when I jumped into the market with both feet. Another is now, when I’m taking one foot out.

Hope that answers your question, Jayne!

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About me

I founded Money Talks News in 1991. I’m a CPA, and I’ve also earned licenses in stocks, commodities, options principal, mutual funds, life insurance, securities supervisor and real estate.

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