On February 17, 2017, the Dow Jones Industrial Average closed at 20,624. It is up 4.36 percent for so far in 2017. In 2016, when adjusted for dividend reinvestment, the DJIA returned 16.47 percent. Given these extraordinary gains, it’s not surprising that investors are nervous about a bubble that might soon burst.
In his first weekly column as the successor to Scott Burns (who retired), Laurence Kotlikoff, a highly respected economist who teaches at Boston University, didn’t mince words. Here’s his recommendation: “Sell your stocks (and your long-term bonds, too) until the dust settles.”
Here’s why this is bad advice.
Professor Kotlikoff has sound reasons underlying his sell recommendation. He correctly notes that the bull market is long in the tooth, having lasted for 8 years. The price of stocks is “very high relative to profits”. The possibility of unsettling news (like a trade war or a boycott of U.S. goods, among other possibilities), given the turmoil caused by the policies of the Trump administration, could cause the market to crash. He correctly notes that “uncertainty and the stock market don’t mix.”
The harsh reality, as Professor Kotlikoff candidly acknowledges, is that “smart economists never predict the stock market” because the market is random and unpredictable. Why then does he make an exception? Because “economic theory is not perfect” and “...bubbles ... can burst at any moment because they aren’t based on fundamentals.”
He could be right....or wrong. No one knows.
The track record of economists who predict the direction of the market is not encouraging. Larry Swedroe, the Director of Research for The BAM Alliance, summarized the data in this blog post.
Remember the Great Recession in 2008? A survey of professional forecasters thought the chance of a recession was only 3 percent. Swedroe noted that “since 1990, economists have forecasted only two of the 60 recessions that occurred around the world a year in advance.”
Even if someone could tell you when to get out of the market, can they also predict when you should get back in? Stock markets tend to recover very rapidly. For example, in 2008, the S&P 500 index (dividends included) lost 37.2 percent. Let’s assume you relied on an economist and went to cash in 2007.
For the two-year period from 2009-2010, the S&P 500 index gained 46 percent. It’s been on an upward trajectory since that time. What are the chances the “guru” who predicted when to get out was also able to provide the optimal time for reentry?
There’s a better way to deal with current market conditions. Take a hard look at your asset allocation (the division of your portfolio between stocks and bonds). Given the run-up in stock returns, your portfolio has probably increased significantly in value over the past 8 years (assuming you have stayed the course and ignored most of the financial media!).
Do you really need to take as much risk? If not, reduce your allocation to stocks. Be sure you have enough short term, high quality bonds in your portfolio that you wouldn’t need to sell stocks at a loss for a 2-3 year period to fund your expenses.
The market may take off or tank. Intelligent investors focus on factors they can control, like their asset allocation, low fees and deferring or eliminating taxes. While I have a high regard for Professor Kotlikoff, relying on his predictions (or those of anyone else) about the direction of the market, is not a responsible way to invest.
The views of the author are his alone. He is not affiliated with any broker, fund manager or advisory firm.
Any data, information and content on this blog is for information purposes only and should not be construed as an offer of advisory services.
Get Dan’s investing insights by signing up for his free, weekly newsletter here.
Follow Dan Solin on Twitter: www.twitter.com/DanSolin
Our 2024 Coverage Needs You
It's Another Trump-Biden Showdown — And We Need Your Help
The Future Of Democracy Is At Stake
Our 2024 Coverage Needs You
Your Loyalty Means The World To Us
As Americans head to the polls in 2024, the very future of our country is at stake. At HuffPost, we believe that a free press is critical to creating well-informed voters. That's why our journalism is free for everyone, even though other newsrooms retreat behind expensive paywalls.
Our journalists will continue to cover the twists and turns during this historic presidential election. With your help, we'll bring you hard-hitting investigations, well-researched analysis and timely takes you can't find elsewhere. Reporting in this current political climate is a responsibility we do not take lightly, and we thank you for your support.
Contribute as little as $2 to keep our news free for all.
Can't afford to donate? Support HuffPost by creating a free account and log in while you read.
The 2024 election is heating up, and women's rights, health care, voting rights, and the very future of democracy are all at stake. Donald Trump will face Joe Biden in the most consequential vote of our time. And HuffPost will be there, covering every twist and turn. America's future hangs in the balance. Would you consider contributing to support our journalism and keep it free for all during this critical season?
HuffPost believes news should be accessible to everyone, regardless of their ability to pay for it. We rely on readers like you to help fund our work. Any contribution you can make — even as little as $2 — goes directly toward supporting the impactful journalism that we will continue to produce this year. Thank you for being part of our story.
Can't afford to donate? Support HuffPost by creating a free account and log in while you read.
It's official: Donald Trump will face Joe Biden this fall in the presidential election. As we face the most consequential presidential election of our time, HuffPost is committed to bringing you up-to-date, accurate news about the 2024 race. While other outlets have retreated behind paywalls, you can trust our news will stay free.
But we can't do it without your help. Reader funding is one of the key ways we support our newsroom. Would you consider making a donation to help fund our news during this critical time? Your contributions are vital to supporting a free press.
Contribute as little as $2 to keep our journalism free and accessible to all.
Can't afford to donate? Support HuffPost by creating a free account and log in while you read.
As Americans head to the polls in 2024, the very future of our country is at stake. At HuffPost, we believe that a free press is critical to creating well-informed voters. That's why our journalism is free for everyone, even though other newsrooms retreat behind expensive paywalls.
Our journalists will continue to cover the twists and turns during this historic presidential election. With your help, we'll bring you hard-hitting investigations, well-researched analysis and timely takes you can't find elsewhere. Reporting in this current political climate is a responsibility we do not take lightly, and we thank you for your support.
Contribute as little as $2 to keep our news free for all.
Can't afford to donate? Support HuffPost by creating a free account and log in while you read.
Dear HuffPost Reader
Thank you for your past contribution to HuffPost. We are sincerely grateful for readers like you who help us ensure that we can keep our journalism free for everyone.
The stakes are high this year, and our 2024 coverage could use continued support. Would you consider becoming a regular HuffPost contributor?
Dear HuffPost Reader
Thank you for your past contribution to HuffPost. We are sincerely grateful for readers like you who help us ensure that we can keep our journalism free for everyone.
The stakes are high this year, and our 2024 coverage could use continued support. If circumstances have changed since you last contributed, we hope you'll consider contributing to HuffPost once more.
Support HuffPostAlready contributed? Log in to hide these messages.