Deploying Cash When The Market Is At All Time Highs

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A reader left a comment on the Seeking Alpha version of last week’s blog post asking for my thoughts on how to deploy cash now given the highs in the markets and valuations that are at the very least stretched (some would obviously say the market is now very expensive). He added the context of someone being 20 years until retirement.

There is a lot here to discuss but the overall assumption for any comments in this post is maintaining a proper asset allocation. This is a crucial building block for a successful outcome. Proper weightings between the asset classes, even what asset classes to own will vary from person to person for a long list of reasons. Any investor needs to figure this out either on their own or with the help of an advisor. Finding out you had too much of the “wrong” asset class after that asset class has had its large decline is a bad place to be.

There are many valid strategies for deploying cash but about the worst way for investors is doing so via a guess about what the market will do. The reader notes valuations as being a reason for caution and maybe a reason to hold off. The way this has played out is that valuation hasn’t been a great indicator for major turns in the broad market and actually the history of industrial sector stocks has been to buy them when they are expensive on a PE basis (pick your favorite mega cap industrial and chart it against its PE ratio going back a way, you might be surprised).

Markets can stay expensive for years. Do a search for Shiller PE 2011 (aka CAPE) and you will find articles debating whether the then “expensive” CAPE meant a decline was imminent. In the last five years the S&P 500 is up 64%. Anyone compelled by the CAPE analysis in 2011 missed a lot of upside. No one knows what the market will do. The end could be nigh or stretched valuations could grow to become wildly expensive, maybe doubling again over the next five years (not a prediction, just a possibility even if small). Anyone relying on growth from the stock market can’t miss too many of the huge runs that come along every so often.

I think it is better to err on the side of being invested (subject to proper asset allocation and discipline to whatever investment strategy is chosen). With that in mind one way to deploy cash is simply to go all in building a diversified portfolio that, again, has the suitable asset allocation and sticks to the stated investment strategy, whatever that might be.

My preferred way is to move in with a fixed percentage over a certain time interval. Examples of this would be 20% every two months half now and half in six months or something else that the client will be comfortable doing. It avoids going all in the day before a bear market starts, although that is easily recovered for most time horizons. Going in this way is potentially a win-win in that if the market keeps going up the investor is participating and if the market goes down there is dry powder to buy cheaper.

If going this route though, it is crucial that once this sort of plan is put together, it be adhered to without fail. A plan like this is made when emotion is not in play, changes to a plan along the way would obviously be borne out of emotion which is a terrible strategy.

To the reader’s question which includes a 20-year retirement date there will be very few possible outcomes where waiting will be beneficial, yes a couple having to do with huge bear markets starting right away, but that doesn’t happen too often. Part of my investment strategy is to take defensive action based long term moving averages which would hopefully mitigate some of the consequence of deploying right before a bear market.

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