A very short history / finance / economics lesson:
By the time March 6th 2009 rolled around, the Dow Jones Industrial Average dropped 54% to 6,469 from its high of 14,164 on October 9, 2007. This oversized market correction took many by surprise, while others saw it coming and profited off the high point and the low point.
If you had bought stocks in September 2007, your return over the next 7+ years through today would be about 27%.
But when you adjust for capital gains tax (at 15%) and inflation (using the B.S. 2% number), the annualized return drops to just 2.5% per year….not really a great return.
In other words, if you buy at a high point and sell at a higher point, the gains are quite small.
You don’t need to be Nostradamus to see that the market is high right now and will go lower at some point in the future.
If your retirement savings is tied up in the US stock market and the market as a whole declines, what happens to the value of your savings? It goes down. It does not matter that your “portfolio is diversified” across asset classes. When the market as a whole goes down, you lose.
You may ask “What can I do?”
Buy low, sell high.
You might then ask “How?” I can’t sell stocks in my IRA without liquidating and taking a huge tax and penalty hit, and besides, my IRA only allows investments in US stocks and bonds.
To that I say why does your IRA only invest in US stocks and bonds? Why are you letting someone who gets paid to sell stocks, manage your retirement savings. Relying on a salesman to manage your money is a little crazy, don’t you think?
Longboat Retirement Solutions can help you set up a Self Directed Retirement Account that will enable you to control your retirement saving directly, meaning that you can invest in what you want, when you want.
In other words, if you feel like the market is nearing a top, you can sell the stocks that you have and hold cash, ready for a low point to buy back in.
Or, as many people suggest, you could buy physical metals or real estate with your retirement savings.
There are mountains of research out there that aim to predict when the market will crash or correct. None of this matters when you are talking about your retirement savings. You need to be able to move in and out of the market when it is high or low.
It’s a simple technique. When something is undervalued, you buy; when something is overvalued, sell.
How do you tell when an individual stock is overvalued? Well, you can use a thousand formulas, or buy research, or use your gut feeling, or darts. But, unless you are a day trader, this doesn’t matter either.
What does matter is the fact that the US stock market is at an all time high. That means that your portfolio is probably in a good place right now. This also means that it has a greater potential to lose money in the near future.
What I’m saying here is “SELL HIGH, BUY LOW”.
This is not anything revolutionary. I am not Nostradamus. I am not a stock picker or a trader.