Markets around the world have been hitting successive highs, regularly. But they have come off the boil slightly, of late. Some people are, understandably, getting a little nervous. Why wouldn’t we? Those of us who are sitting on handsome gains don’t exactly want to watch our hard-earned paper profits evaporate. So what do we do? Some might consider taking some money off the table. What else? By cashing in some, if not all of our chips, we can conveniently sidestep a market fall. We can then sit on a pile of readies and watch while others ponder whether and how…
Markets around the world have been hitting successive highs, regularly. But they have come off the boil slightly, of late.
Some people are, understandably, getting a little nervous. Why wouldn’t we?
Those of us who are sitting on handsome gains don’t exactly want to watch our hard-earned paper profits evaporate. So what do we do? Some might consider taking some money off the table. What else?
By cashing in some, if not all of our chips, we can conveniently sidestep a market fall. We can then sit on a pile of readies and watch while others ponder whether and how long and how far the markets could correct.
And there are probably a hundred and one reasons why some might think that the market could take a tumble. For instance, Brexit negotiations could disintegrate without resolution. That would be awful.
The US economy could come off the rails, which could put the US Federal Reserve in a bind. Markets believe that the central bank is on course to raise rates a few more times between now and the end of next year. Anything that could disrupt the hikes could be a worry, as people start to think the worst.
Then we have Donald Trump’s ambitious tax cuts for both US households and American corporations. There is little evidence that we could see anything happening anytime soon.
And there’s more….
Let’s not forget problems in the Middle East are far from being resolved. Nor has the renegade North Korean leader, Kim Jong-un, been brought under control. Who knows what he might do next. The unpredictable despot could wreak havoc with the press of a button.
To further fan the flames of doubt about the bull market, a correction of sky-high property prices from Sydney to Shanghai, and from Hong Kong to New York, could have a knock-on effect on equity markets. Property owners would suddenly feel a lot less wealthy.
And what happens when it does? What do central banks have left in their armoury, if we should see a severe market correction? Will they be as accommodative next time around with their money-printing machine?
The unwilling bull
Point is, there are lots of reasons to worry. But there were lots of reasons to worry eight years ago too, when the bull market started on its charge. Nobody believed that it was actually happening at the time.
It was a bull market that defied all logic. It was a bull market that nobody believed was possible. It was a bull market against all odds.
After all, the global economy was in a mess. Banks were in a mess. And governments around the globe were in a mess. But still, the bull market that nobody believed could happen, happened.
There were wobbles along the way, though. Naysayers were quick to say “I told you so“. But the bull found is legs and continued on its run.
A dose of reality
That said, markets are looking more expensive now, especially the US market. It is valued at nearly 25 times earnings.
But here’s the thing….
….Even though the US stock market is valued at around a-third more than its long-term average, it looks more attractive than the risk-free return of around 2%. The Singapore market is even more compelling at around 15 times earnings.
If Singapore companies could pay out all of their profits as dividends, it would equate to a yield of 7%. The equivalent yield for US shares would be around 4%.
So, whichever way we look at it, the market doesn’t look expensive compared to the alternatives.
So why would we want to sell?
Fear of the unknown could be one reason. But the future is never very clear. If the future was absolutely certain, then shares would most likely cost the earth.
Another reason could be prudence. But to ditch an investment that has historically generated inflation-beating returns for something that hasn’t is misguided prudence. It is reckless prudence.
When we put our money into an investment we should be able to estimate the yield on that investment over its lifetime. Provided we are comfortable with the yield that the company generates then we should hold on.
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A version of this article first appeared in Take Stock Singapore. Click here now for your FREE subscription to Take Stock – Singapore, The Motley Fool’s free investing newsletter.
The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore Director David Kuo doesn’t own shares in any companies mentioned.