Investors love a bull market. When stock prices rise, investors are eager to jump in for fear of missing out. But when the bears push the market in the opposite direction, investors fearfully sell their holdings.
Yet shouldn’t investors be doing the opposite? When their stocks run higher, it’s a great time to sell. Why? Because you’re not likely to pick the top. But you might as well sell out when valuations are high. Then, when stocks decline, it’s the best time to buy. As the stocks fall, they become cheaper. And as stocks become cheaper, they require less capital outlay.
For example, if you could buy real estate worth $1 million for $500,000, you wouldn’t consider that risky, would you? Yet if stocks drop substantially below their intrinsic value, investors want nothing to do with it.
So where are we now?
Right now you could say we’re still in the midst of a bull run. In the US especially, the market is now up more than 10%. And what’s perpetuating this buying frenzy is the expectation of higher growth to come.
Even the International Monetary Fund (IMF) is predicting strong growth ahead. As reported by The Australian Financial Review:
‘The International Monetary Fund is Increasingly confident the global economy is on track to accelerate over the next 18 months, even as the fund dials back expectations for US growth because of US President Donald Trump’s struggles to legislate fiscal reforms.
‘In an outlook that will likely bolster the Reserve Bank of Australia’s hopes for a long overdue global pick-up as it considers domestic interest rate settings, the IMF forecasts the world economy will grow 3.5 per cent in 2017 and a slightly faster 3.6 per cent in 2018.’
More growth in the market to come…?
And because investors believe there is more growth to come, they’re stocking up on some expensive businesses. Yet even the IMF can’t deny that current equity valuations are ‘rich’.
That’s why I wouldn’t suggest topping up your holdings now. Sit on your portfolio and, if you so choose, take profit and deploy your capital in cheaper options. There’s no point following the herd into higher valuations, as you run the risk of being disappointed in the long run.
Junior Analyst, Markets & Money
PS: Investing in equities isn’t just about picking the right stocks. It’s also about avoiding the wrong ones. Vern Gowdie, our award-winning financial adviser, believes there are five stocks you need to avoid.
In his report, ‘Sell These Five ‘Fatal’ Stocks Now’, Vern will show you the five biggest threats to your wealth, and how you can avoid them.
To get your free copy of Vern’s report, click here.