Are you investing in the stock market? How are you feeling now that the Dow is at an all time high? The S&P 500 and the Nasdaq are just a few points shy of hitting their all time highs as well. Are you feeling flushed with money or are you becoming a nervous wreck? Individual investors are pouring money into the stock again and that is helping to push the stock price higher. It seems everyone is very bullish on the stock market and it is giving me the willies.
Are we heading for a big correction in 2013? Nobody knows, but as the old saying goes – “Bulls make money, bears make money, pigs get slaughtered.” Last week my brother sent me an interesting article about the Greedometer on the Market Watch. I dropped by their site and according to the Greedometer guy, everybody is getting very greedy lately and the Greedometer is redlining.
- Insiders are dumping shares like crazy.
- Margin trading is near an all time high. Investors are borrowing a ton of money to invest in the stock market.
- The VIX (volatility index) is very low at 13. ??? I’m not sure why low volatility equals greed, but perhaps it’s because everyone is expecting the stock market to keep climbing?
- The adjusted P/E on the S&P 500 is around 23. That’s quite a bit higher than the long term average of 16.4.
- Profit Margin is dropping from 11% (record high in early 2012) to 7.65% (Q4 2012.)
- Everyone is celebrating the stock market reaching an all time high and advisors continue to be very bullish.
Anyway, he is expecting a spectacular crash in 2013 or 2014. I don’t know if he is right, but as I mentioned earlier, I’m getting nervous. The truth is that I was quite overweighted in stock after I rolled over my 401k right before Thanksgiving last year. I moved everything into stock ETFs because I thought the stock market would do well in 2013. Of course this messed up my asset allocation and pushed our bond holding down to just 3%. This was a bit risky, but I really didn’t like bonds because the rate was so low. Luckily, the stock market did very well and gained about 10% since then.
Now that the stock market is hitting new high, it’s time to take profit and rebalance a bit. When I rolled over the 401k, I stashed a big portion of the portfolio in VPU (a Vanguard Utilities ETF) which did quite well over the last 4 months. This week, I sold off a big portion of VPU and reallocated the fund to short term bond funds.
I also converted some cash to bonds yesterday. As some readers know, we saved up $50,000 in our online saving account before I quit my engineering career as a backup. It’s been about 9 months now and we haven’t needed it so I’m comfortable with reducing that amount a bit. Yesterday, I woke up early and signed up for an account at Treasury Direct for both of us. The process was more painful than I thought and Mrs. RB40’s hope for a peaceful morning was shattered. Anyway, I purchased some I Saving Bonds from Treasury Direct (rate is 1.76% until April 2013) to increase our bond allocation further. If things are still going well this summer, I will purchase more I bonds then.
Here is our updated asset allocation. It’s still not quite there yet and I need to rebalance more into bonds and alternatives (REIT/precious metals).
|Asset allocation||Target||February 2013||March 7, 2013|
|Cash||Less than 5%||7%||6%|
I’m feeling better now with less stock market exposure, but 80% equity is still way too high when the market is getting so frothy. Actually, I am planning to follow Financial Samurai’s 2013 prediction and sell off most of the stocks in my IRA once we hit 8% gain for the year. Once I do that, it should be easy to ramp up bonds and alternatives. Now that I’m not working a full time job anymore, I need to be a bit more conservative. My equity exposure should probably be closer to 60% or maybe even 50% when investors are getting greedier.
You can also check the free Fear & Greed Index at CNNMoney.
Are you bullish on stocks or are you getting fearful?
Disclaimer: I am not a financial advisor and I don’t even play one on TV. I’m just a regular Joe investor who consistently added to our stock market investments over the years. If you need help with investing then you should schedule an appointment with a good financial planner. You can also try Personal Capital. Personal Capital is a new site that analyzes and keeps track of all your investment in one place for free. You can also qualify for a free financial review from their financial advisor if your investable assets are over $100,000.
photo credit: flickr zoonabar