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.
Final Thoughts
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.
Other than the dividend investing crowd I don’t see a lot of bloggers talking about buying individual stocks and timing the market. The conventional wisdom seems to be index funds and putting investment money to work immediately regardless of where the market is. It’s interesting to see a contrarian viewpoint. I’m too lazy to go with an active strategy myself, so I’m just an indexer, but I do believe that with enough effort you can likely do some better than the herd of investors like myself.
I’m mostly an indexing guy too, but I find investing in individual stocks entertaining/interesting. When I say “buy stocks” as in this series, it’s mostly about buying an index. It could be a total market fund or something like a small cap fund or whatever your allocation allows. I usually end up buying what seems on sale. For example, tech companies seem cheap to me right now.
I find there’s usually a place to put money to work. Even when it comes to saving up for a real estate purchase, I just consider that money extra emergency fund. However, with interest rates where they are now, it’s easy to invest that money at 3%+.