“FOLLOWING the market’s recent banner year, should we just sell everything and get out?” I got that question recently, and it’s entirely understandable. Since hitting bottom in 2009, U.S. share prices are up fivefold, including the S&P 500’s 31.5% total return in 2019.
Individual investors aren’t alone in asking this question. A few weeks back, at an industry conference, James Montier delivered a presentation in which he compared the U.S. stock market to “Wile E. Coyote—the hapless adversary of Roadrunner—having run off the edge of a cliff only to realize the ground is no longer below his feet.”
Montier is no armchair critic. A senior strategist at the investment firm GMO, his presentation was thoughtful and well argued. His message: Get out of U.S. stocks, where valuations are “in the realm of disbelief,” and move your savings into emerging markets and other assets, where prices are much more reasonable. That, he noted, is exactly what his firm has done, owning “essentially zero” U.S. stocks. Montier supported this argument with detailed facts and figures.
As an individual investor, what should you make of these arguments? Is now the time to sell out of U.S. stocks? I have four concerns with this idea:
1. Yes, the market might fall—but it might go higher first. You don’t have to look too far back in history to find an example. Let’s say it’s the beginning of 2017 and you feel that the market is pricey. At that point, it would have been reasonable to predict a downturn. After all, the market had already tripled over the preceding eight years.
Suppose you sold all your stocks at the beginning of 2017. Well, you would have been proved right: The market did subsequently fall. In 2018, the market hit several potholes and was negative for the year. But here’s the problem: When the market dropped in 2018, it fell to levels that were still higher than those at the beginning of 2017. Result: Even if you’d correctly predicted a dip in the stock market, you still would have been worse off. The lesson: Timing is everything—and it’s very hard to time the stock market. History can serve as a guide, but not as a crystal ball.
2. My second concern is related to my first point: What action would you take after selling? Would you plan to buy back in? If so, at what level? And what if you got a repeat of 2017, in which the market did subsequently decline, but not to a level any lower than when you’d sold? You might find yourself stuck in cash while the market continued to march higher.
3. If you sell assets out of your taxable account, what would be the tax impact?
4. Valuation is not a science. There’s no question that U.S. valuations are higher than those in other parts of the world. But that doesn’t mean there’s a mathematical certainty that U.S. valuations will fall or that valuations in other parts of the world will rise.
The reality is, the U.S. is home to a longer list of bigger, more innovative and more profitable companies than anywhere else. Consider just the top five companies by market value: Microsoft, Apple, Alphabet (a.k.a. Google), Amazon and Facebook. You’d be hard pressed to find equivalents of these companies anywhere else in the world, let alone all together in one country.
If you look at other major economies, I think you’ll find good reasons for this. In Europe, cultural norms discourage entrepreneurship. In Japan, they’re contending with a shrinking population. And in China, the government’s posture makes it hard for creativity and innovation to flourish. In other words, I don’t think it’s any accident that the U.S. tends to breed more innovation than anywhere else. Maybe there’s good reason U.S. stocks carry higher valuations—and will continue to do so.
Could things turn out the way Montier is predicting? Certainly. But they might not. What’s important to understand is this: Montier’s argument is perfectly logical, but you could just as easily construct an argument to support the exact opposite view. That being the case, I’d argue the best approach is the simplest: Structure a portfolio that’s sensibly diversified among global markets in a way that acknowledges these uncertainties. Then leave it alone. Unless your financial circumstances change, don’t tinker.
Adam M. Grossman’s previous articles include Adding the Minuses, Believe It or Not and Portfolio Makeover. Adam is the founder of Mayport Wealth Management, a fixed-fee financial planning firm in Boston. He’s an advocate of evidence-based investing and is on a mission to lower the cost of investment advice for consumers. Follow Adam on Twitter @AdamMGrossman.