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Are You Buying When Investors Are Getting Greedy?

{ 38 comments }

greed is good stock investingAre 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.

IRA

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
US stocks 50-55% 65% 60%
International stocks 23% 20% 20%
Bonds 10-15% 3% 9%
Cash Less than 5% 7% 6%
Alternatives 5% 2% 5%

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

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{ 38 comments… add one }
  • The College Investor March 8, 2013, 1:48 am

    I’m getting to be very fearful. I just did my Roth IRA contributions and am holding it in cash for a while until more certainty comes to the markets.

  • JC @ Passive-Income-Pursuit March 8, 2013, 5:01 am

    I’ve been sitting on the sidelines most of this year and made just 2 buys. The rest of the cash has been mainly used to sell puts on companies that I want to own at prices I feel comfortable with or give at least a 10% annualized return if they expire. If we don’t get anything before May then hopefully the “sell in May and go away” will turn up this year to at least put the markets’ rise on hold for a while. We almost made an average year’s return in January alone but the markets can stay crazy for a long time.

  • Emily @ evolvingPF March 8, 2013, 5:26 am

    Yes, we are buying – exactly how we have always been. We are long-term investors not looking to time the market.

    • retirebyforty March 9, 2013, 8:52 am

      That’s great. If your have a long time left to invest, you will do just fine.

  • J.M. March 8, 2013, 5:26 am

    I too am fearful. I have been rebalancing my portfolio as of late and have been doing more selling than buying. Im having trouble finding fair valued companies I want to invest in. That said, I primarily own high quality dividend stocks and my investing horizon is 40+ years, so I wonder if I should continue to sit on the sideline.

  • Jane Savers @ The Money Puzzle March 8, 2013, 6:56 am

    I will be making a stock purchase this month. I want to add another dividend paying Canadian bank to my portfolio.

    I buy whenever I can scrape together enough money to make a buy and I will continue to do that. I am a stock holder and I won’t need the money for 10 to 15 years.

    • retirebyforty March 9, 2013, 8:54 am

      We are net buyers too, but sometime I get nervous. I don’t mind losing out on the gain a little bit as long as our goal for the year is met.

  • Tina @ My Shiny Pennies March 8, 2013, 7:04 am

    I don’t always follow my own advice, but I try to make purchases at regular intervals to avoid buying too high.

  • Dan March 8, 2013, 7:17 am

    I am not changing my 401k contributions, that is where my actual long term investing is. For my Roth and Rollover 401k I cleared out everything, I was up 15-20% on all holdings and decided to take my money and sit in cash until a correction happens, these days it always does.

    Market continues up, my 401k will too, if it retreats, I’ll be ready to pounce. There are always deals, I’ve learned to cash out when I’m up and do research to find new bargains.

  • Nunzio Bruno March 8, 2013, 7:26 am

    I like to think that I am conditionally bullish haha! I like the idea of markets responding to improving economic conditions and would love to see the real/raw data actually reflect that. Do I think markets are in for a bit of a correction as a result of a little too much excitement – yes. But I think that this should make for a positive year in not just financial markets but in all of our lives too. I mean I may just be the lowly adjunct finance and econ professor but that’s where my heads at 🙂

    • retirebyforty March 9, 2013, 8:54 am

      Thanks for your input. The economy certainly is looking a lot better with the new employment numbers.

  • SavoirFaire March 8, 2013, 7:54 am

    I’m nervous but then again I’m generally a cautious person.

    I think the market is way too high for where we are right now. I think there is a delay between sequestration and the actual effect on our economy. The market is glossing over this fact right now plus we are only about mid way through the drag from Europe.

    I don’t foresee a 2008 again (at least for quite some time), but I do see a large pull back. Optimistically the very best the DOW should be is around 13K but it’s way over that and the economy is not moving in the fast pace that the market is reflecting. This is somewhat unusual as the market is often ahead of the game. I think the job market will remain stable but it is still weak. GDP will slow down considerably once the government cuts take effect. By the end of the year reports will show consumers have once again pulled back. The only exception will be if the government somehow makes a decision that will make cuts painless. Personally I’m getting particularly peeved at this current administration ALL of them. The crap they pull is unreal and we are all victims, the rich, the poor, and the middle class — but that’s for a whole other post.

    The only plus side we have had from the market has been that the recent dips in the market have seen quick recovery usually within 2 day. Something we have not seen for quite awhile. These positive comebacks indicate any hit the market takes will not be devastating for the long term, thus we will not get hard hit like we did in 2008.

    South Korea is on the verge of war (technically they have never stopped) with North Korea, something that seems inevitable and we will be right by their side. I’d imagine we are already moving troops there already. This war will probably be quick and closer to traditional modern war and nowhere as complex as those in the Middle East. It’s an old school pissing competition however the initial impact may be quite devastating.

    So as far as the market is concerned, I’ll probably wait till late summer to buy anything and will take profits in the very short term where it’s feasible. I used to be more of an all-in investor, but have become much more conservative now. Over the past 2 yrs or so I’ve been holding a lot more cash then usual allowing me to better weather these uncertain times. It’s allowed me to pick up some better value bargains when they appear. It’s also made me a lot less stressed.

    • retirebyforty March 9, 2013, 8:58 am

      Great input. I was an all-in investor too, but now that I’m not working a full time job anymore, I need to be more conservative. I’ll pull more fund out of the market soon. Less stress is good.
      A war in Korea would be devastating. We don’t know what China will do. They could cause a ton of trouble for our economy.

  • Financial Samurai March 8, 2013, 8:20 am

    Nice job taking some profits! For the record, my prediction is a 8.8% S&P 500 return, not just 8% 🙂

    What’s also interesting is that everybody is turning into a stock market analyzer, not just financial professionals. With so much writing about the stock markets, I’m definitely taking profits.

    • retirebyforty March 9, 2013, 8:59 am

      Your prediction is 8.8%, but I would be happy with 8%. 🙂 I just need 1% more and I’m pulling a lot of fund out of the market.

  • so March 8, 2013, 8:55 am

    We are increasing our contributions in our taxable account. The market is always jittery and volatile, so we’ll just DCA into that for the next few years. Our taxable brokerage account is basically 100% equities. We don’t need the money for 10-15 years and it’s a diversification play, as we are too heavy in RE and tax-deferred retirement plans.

    Plus, it is our second-level emergency fund if our cash emergency fund of 6 months on all mortgages plus 1 yr tax and insurance for all properties, something along the lines of $75K, goes dry.

    • retirebyforty March 9, 2013, 9:00 am

      Our after tax account is almost 100% equity too. I’m a lot more conservative with our retirement portfolio.

  • Lacy @EarnVerse March 8, 2013, 9:33 am

    Not to point directly to my own blog, but I just read a great book “The Most Important Thing” by Howard Marks, and wrote a review/overview of it. I highly recommend the book, but he talks about how greed and fear create bubbles and recessions and the way that we as ‘rational’ investors can take advantage of those swings.

    I myself am starting to take better stock of where we are now. When I have friends who have no clue about the market, nor typically care, and they start telling me about how great their 401k is doing…that to me is typically a sign that things are starting to swing a bit too far in one direction.

    • retirebyforty March 9, 2013, 9:01 am

      That’s right! When everyone is feeling rich, that’s when you should start to get nervous. That’s why I’m taking some profit now.

  • My Financial Independence Journey March 8, 2013, 9:34 am

    Every month I get fresh capital and every month I look for under or fair valued quality dividend paying stocks to buy. I don’t really care what the market as a whole does as it doesn’t alter my buying strategy. The downside of a bull market is that more stocks are overvalued and thus don’t make my buy list, making it harder to find good investments.

    I love all these people who run around predicting spectacular crashes. If I predict a crash every single year, I’m bound to be right eventually. And then somehow I’m an investing genius. Everyone conveniently forgets all the wrong predictions I made. One day I would love to dredge up historical prediction data from these “experts” and run it out on a ROC curve. I suspect they’d be about as accurate as Puxatony Phil. To put it another way, I don’t really care what any expert predictor has to say unless they can produce data showing just how accurate their predictions are.

    • retirebyforty March 9, 2013, 9:02 am

      Heh heh, you’re right about the geniuses. I used to keep buying too, but now I don’t have as much new capital so I need to be a bit more conservative. i can’t lose 30% of my portfolio anymore.

  • krantcents March 8, 2013, 11:10 am

    This what makes a stock market! Different opinions looking at the same information. I keep on investing (dollar cost averaging) although I made some changes years ago to avoid some of the volatility. I am willing to take some risk because my pension and Social Security will cover my needs in retirement.

    • retirebyforty March 9, 2013, 9:04 am

      Wow you are quite gutsy for an older guy. 🙂

  • Kurt @ Money Counselor March 8, 2013, 11:42 am

    We are sellers of equities, not buyers. Sold a chunk yesterday, and plan to sell an even bigger chunk sometime within the next few weeks. I don’t know when this is going to happen, but when QE ends and bond prices begin falling, I think the stock market may tank for the third time in 15 years. I’m not willing to run that risk; I’ll take my money now.

    • retirebyforty March 9, 2013, 9:05 am

      That’s how I feel too. I’m willing to lose maybe 20% top. I can’t handle another 40-50% drop.

  • Nick March 8, 2013, 12:01 pm

    It makes me a little nervous that stocks are at an all-time high. But I will continue to buy all the same. I’m in the game for the long haul! 🙂

  • John S @ Frugal Rules March 8, 2013, 12:04 pm

    I don’t know that I am fearful but definitely watching things. As a whole I plan on continuing the course that I have been and not jump when everyone else is. I have some cash sitting on the sidelines as it has been for a while to take advantage if things do indeed go south. I have a couple of really nice gainers in both of our IRA’s that I may take the profits on and wait for another dip.

  • jim March 8, 2013, 1:08 pm

    I’m still fairly bullish. The PEs are not high compared to historic averages so stocks are not overvallued. The economy has still been pretty slow and I think we’ve got good room for future growth.

  • Fab March 9, 2013, 7:03 am

    Kind of stuck myself with the so-bullish markets. I hold some $100K in money market / low-interest savings right now and have been holding off investing waiting for a correction. Better than holding 100% cash, would you say it is an option to purchase some bonds…

    I usually invest at Vanguard. When looking at their bonds funds (https://personal.vanguard.com/us/funds/vanguard/all?reset=true&sort=name&sortorder=asc&assetclass=bond), there are a number of funds (VWESX, VBLTX etc…) which have very good dividends for a long time and still held not that bad in 2008.
    Am I missing something with these?

    • retirebyforty March 9, 2013, 9:09 am

      I think you need to figure out our risk tolerance and come up with an asset allocation plan. Going all in on bonds or stock or cash probably isn’t a good idea. It’s hard to time the market.
      From what I understand, long term bonds are risky right now because when the interest rise, the price will fall. The yield is nice, but you don’t want to lose money. Short and intermediate bonds have pretty low payout, but should be less sensitive to interest rate change.

  • Fab March 9, 2013, 7:04 am

    Also how are “I Savings Bonds” different than regular funds?

    • retirebyforty March 9, 2013, 9:11 am

      I saving bonds are sold by the US Treasury. You get a baseline interest + inflation adjusted interest. The rate is much better than your typical saving account rate and it’s a safe investment.

  • Mike March 10, 2013, 7:20 am

    I think we’ll have to see. Perhaps you might want to start allocating some funds towards a savings account in the event that something does go south. It’ll be my luck that I invest and diversify those investments that something goes wrong (but that is just me).

  • Elizabeth @ Broke Professionals March 10, 2013, 4:02 pm

    I was reading something the other day that suggested a part of the reason stocks are doing so well is because companies are hoarding money (think Apple). While investors may love this, it’s ultimately bad for the economy (think new jobs). I think a correction, while painful, could ultimately benefit everybody.

  • Little House March 11, 2013, 6:43 am

    Mr. LH has been wanting to get back into the market but I’m a little less eager. Instead, I like my slow-growing mutual funds for now. Perhaps will try the stock market again late this year or early next when we pay down more debt. Until then, I’ll just watch the ride. 😉

  • Maverick March 11, 2013, 1:30 pm

    Joe, where did the 3% go in Feb? 🙂 I too started in I-bonds last fall. Yeah, the online account can be cumbersome due to all the security, transfer of funds from your personal account, etc., but I guess it’s needed to fend off the hackers.

  • Greg March 12, 2013, 5:44 am

    I am glad to hear I am not the only one expecting/waiting on a dip. I just started a new job in December and rolled over my 401k into a Roth IRA in January. Not planning to put the money back into stocks until we see a correction. So these continued days of reports of record highs are hard to swallow, but I expect it to be the right move in the long run. However, 20+ years to invest, so will likely not help or hurt greatly in the grand scheme.

  • Excellent statistics used in this post. Thanks for the clear insight.

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