Bank rates at historical lowsA look at interest rates at prior market peaks shows why backing away from rising market risk would be a tougher decision today than in the past. The dates below correspond with previous peaks in the S&P 500 over the past 50 years. The rates shown are short-term certificate of deposit (CD) rates from the Federal Reserve, though you can assume that savings accounts and money market accounts would have been at similar levels. January, 1966: 4.81 percent
November, 1968: 5.93 percent
December, 1972: 5.22 percent
December, 1976: 4.62 percent
November, 1980: 15.39 percent
August, 1987: 6.63 percent
January, 1994: 5.81 percent
March, 2000: 6.01 percent
October, 2007: 4.95 percent Today, those same yields would be around 0.18 percent. Only time will tell whether recent stock market highs will turn out to be a peak, or simply a step on the way further up. However, as prices rise and market risk increases, investors don't have the option of earning a decent income if they choose to sit out the rest of the cycle. That's why investing has become an all-or-nothing game.
Rules of the all-or-nothing gameHere are some rules for investors in the all-or-nothing game created by low yields and high stock prices:
- Transition gradually in and out of stocks. Large market-timing moves in and out of stocks are never a good idea, but the contrast is even sharper now that there is nothing to be earned by waiting on the sideline. This calls for a more gradual transition out of stocks if you believe prices are getting too high.
- Know what you own. A pricey market is a bad time to own stocks generically. Know the fundamentals and valuations of the specific companies in your portfolio.
- Determine your risk parameters. Know what you can't afford to lose, and keep a corresponding portion of your portfolio in guaranteed vehicles, even if there is little return there.
- Be prepared to accept more volatility. Stocks are the only game in town right now if you want to earn a return, so that means accepting more ups and downs.