Q.

Do you have any comments regarding holding any money for investing since the stock market is at all-time highs? For example, Mark Cuban stated recently that he liquified multiple assets and that Berkshire Hathaway is holding more than $100 Billion in surplus cash as if waiting for the right moment to invest?

Q. 

I am an airline pilot who recently moved to Europe for work. We sold everything (house, cars, furniture, etc.) during the move and are sitting on a pile of cash….with having zero debt I’d love to put the cash in an index fund but at 25,000+ the market feels overvalued and on a precipice so I have a hard time deciding what to do. We will need to return to the U.S. in a few years so will need some cash to buy the house, cars, and furniture etc. Any insight would be appreciated.

A.

I get some variant of this question pretty regularly. The only time I can recall NOT seeing it was from about September 2008 to June 2009. I answer it the same way every time:

“I have no idea if we are at a market top and neither do you. Nor does Mark Cuban, Warren Buffett, CNBC, or anybody else.”

The realization of that fact, like coming to understand that index funds will outperform the vast majority of actively managed mutual funds over the long run, is immensely freeing. It allows you to concentrate on what really matters rather than spending all your time, worry, effort, and mental energy on something that doesn’t. Now, it isn’t that what happens in the near future won’t have an effect on your portfolio and financial position, it is simply that you really can’t do anything about it, so why worry about it? Actually, that’s not entirely true. You CAN do something about it. You can buy and sell and try to time the market. The problem is that you SHOULDN’T do anything about it, because you are far more likely to hurt yourself by trying to time the market.

The smart ones learn this lesson from watching the mistakes of others. But some of us have to make it ourselves, often multiple times.

Guru-based Investing

Guru-based investing doesn’t work. I recall a study that looked at thousands of guru predictions about where the market was heading – they were correct 47% of the time, i.e. less accurate than a coin flip. “But it’s Warren Buffett!,” you say. Okay, let’s go to the tape. Apparently, Berkshire Hathaway has underperformed the market over the last decade. Look, if you think Warren Buffett can predict the future well enough to take advantage of it, just buy Berkshire Hathaway stock and quit worrying about anything else. But even a cursory examination of the record would cast doubt on that premise. I mean, take a look:

9.76% for the market and 9.39% for Warren Buffett over 15 years, and it’s even worse when you look at shorter time periods. That doesn’t seem to be the work of someone who can successfully predict the future. Why is the performance lower than the market? Well, it may very well be the cash drag. The difference between getting an 8% market return and a 1% cash return on $100 Billion is about $7 Billion dollars, or about half the state budget of Utah.

The other issue for Warren Buffett is that $100 Billion is a large number. What kind of a deal do you need to deploy $100 Billion? There are only about 50 companies in the S&P 500 that have a market capitalization larger than $100 Billion. So outside of those 50, you could buy the entire company with $100 Billion.

Emotion-based Investing

As bad as guru based investing is, it is almost certainly better than emotion based investing. This is where you invest based on your own fear and greed and where you “feel” the market is at. This is an almost certain recipe for buying high and selling low. If your feelings could lead to outperforming the market, why would you be sitting in a clinic seeing patients instead of running a $100 Billion mutual fund? Besides, the market “felt” high to people in 2009-2010 (remember the fear of the double dip?, I do), and has felt high every year since. But what has the right move been so far? To hold your nose and invest.

My premise is that you are far better off acknowledging the near-certainty that you cannot predict the future and coming up with an investment plan designed to be successful in a broad range of future economic scenarios. Perhaps the best is a simple, fixed asset allocation you will hold through good times and bad. That’s what I have done since I started investing in 2004 and it worked very well for me, so I recommend it to others.

Stocks for the Long Run

disability insurance disability doc
Of course, this all assumes this is money you are investing for the long run. Money that you need in 2 years for a house, a car, or furniture shouldn’t be invested in the market at all. In the short run, the market return is dominated by its speculative component. In the long run, the market return is dominated by its investment component. But even on the eve of retirement, the vast majority of the portfolio is not going to be spent any time soon. Even on the eve of college enrollment, you don’t have to have all your 529 money in cash since some of it might not be spent for 3-4 years, more if the child goes to grad school.

Your Asset Allocation Might Be Too Aggressive

In truth, the fear of putting a lump sum into the market may be due to being too aggressive in your investments. The asset allocation that is right for you is the one where your fear of missing out on gains is precisely balanced by your fear of loss from market fluctuation. Unfortunately, those fears are not static, so you’ll have to assess where those fears are for you over the long-term. In 2008, I was 75% stocks and 25% bonds and that felt about right for me. I didn’t feel a need to sell stocks, but in early March of 2009 at the market bottom, I wasn’t super excited to buy more either. So if you’re uncomfortable buying into the market with a 90/10 portfolio, dial that risk level back until your fear of missing out kicks in. Maybe that’s 70/30 or 60/40, I have no idea. But at a certain point, holding cash won’t be so attractive to you. Of course, if that point is a 10/90 portfolio, you probably ought to consider the words of Phil Demuth:

Your psychological predisposition to take or shun risk is irrelevant to the ultimate means to reach your investment objectives…If you are a sensitive soul who can brook no paper losses, the solution is to get a grip, not to invest “safely” if that locks in running out of money when you are old.

We’re Usually at Market Highs

Finally, while it would be fun to go back and invest in March 2009 knowing what was about to happen, the truth is that we are USUALLY investing at market highs. Take a look at the chart:

As you can see, buying at any point from 2005-2007 or from 2013-2018 was buying at a market high. If you go back further in time, you can see this is NORMAL. Check it out:

stocks all time highs

Why does this kid have a larger Roth IRA than you? Because she isn’t afraid to invest at market highs. If you’re 3 years old, that’s all you’ve known.

This is a logarithmic scale, which seems a bit more accurate. As you can see, the market spends about 3/4 of its time at a market high. If you wait to invest until the market ISN’T at a market high, there is a very good chance you will be waiting for years AND buying in at a higher level than you would have. Consider the worst case scenario – an investor with such terrible market timing that she ALWAYS buys at the market peak. What do her outcomes look like? Luckily for us, Ben Carlson, CFA, has answered this question. Basically, over the long run, she ends up with half the money as if she had just invested every month like a blind monkey. But she still ends up with enough to reach her financial goals.

My recommendation to you if you’re having trouble convincing yourself to buy at a market high? Invest like they vote in Chicago – early and often.

What do you think? How do you invest at market highs? Comment below!