While every other blogger is writing year-end recaps, I’m taking a minute to do something new and different. I’m in the phase of my life where I typically make more from investing than I do from all my side and freelance gigs.
While it’s best to invest over time, there may be specific times when investing in one asset vs. another asset is better. The winning formula is to buy low and sell high.
Stock Market Outlook
Predicting the stock market accurately is impossible. However, it is possible to know when to buy/sell stocks based on when the markets are cheap or expensive. When the stock market is cheap, I buy stocks. When the stock market is expensive, I look for cheaper investments such as bonds or housing. It’s worked out well for me.
I determine if the markets are expensive or cheap by looking at the Shiller P/E. The Shiller P/E is an evaluation that I cover in more detail in the link in the previous paragraph. Since the mid-1990s, the Shiller P/E average has been around 26-28. It was a low of 15 in the crash of 2009 – a fantastic time to buy. The Shiller P/E reached a high of 44 in the dot-com boom – the best time to sell. Before the stock market’s drop this year, the metric was around the 37-38 range – a sign that it would be an excellent time to sell.
I would never sell all my stocks when the market is high. Instead, I adjust my asset allocation to be more conservative. I also focus more on “value” stocks like consumer staples that people need to buy no matter what.
Current Stock Market: Shiller P/E: 28 (Medium)
It’s a great time to stay the course. Nothing seems particularly cheap or expensive.
Housing Market Outlook
Several months ago, I detailed when to buy and sell real estate. The key is to use the NAHB/Wells Fargo Housing Market Index. It’s rated on a scale of 1 to 100. A rating of 1 means that the housing market is low, and a rating of 100 means it is high. When the HMI is low, it’s good to buy. When it is high, it’s a good time to sell.
The year started with an HMI of 83 (a strong indicator to sell).
Current Housing Market: HMI: 31 (Cheap)
This HMI number indicates it is a very good time to buy. However, keep in mind that interest rates are high. You may need to pay a lot now, and hope that you can refinance to a cheaper rate in the future. Also, real estate is particular to the property you are buying. You may be able to find a great value in an expensive market or a poor value in a cheap market.
These indicators shouldn’t be signs to make any rash financial decisions. They are important indicators for me, and I share them with the hope that they’ll be helpful to you.