Recent highs in the stock market have created a unique dilemma
for investors -- or at least one that hasn't been seen in the last
At previous market peaks, investors seeking a haven from high
stock prices had the alternative of earning at least a respectable
return in less risky vehicles.
and other deposits offered solid and sometimes even attractive
returns. But that is certainly not the case as the market explores
new highs this time around.
The low-yield environment has made investing more of an
all-or-nothing game, so investors had better make sure they
understand its rules.
Bank rates at historical lows
A look at interest rates at prior market peaks shows why backing
away from rising market risk would be a tougher decision today than
in the past. The dates below correspond with previous peaks in the
S&P 500 over the past 50 years. The rates shown are short-term
certificate of deposit
(CD) rates from the Federal Reserve, though you can assume that
savings accounts and money market accounts would have been at
January, 1966: 4.81 percent
November, 1968: 5.93 percent
December, 1972: 5.22 percent
December, 1976: 4.62 percent
November, 1980: 15.39 percent
August, 1987: 6.63 percent
January, 1994: 5.81 percent
March, 2000: 6.01 percent
October, 2007: 4.95 percent
Today, those same yields would be around 0.18 percent. Only time
will tell whether
recent stock market highs
will turn out to be a peak, or simply a step on the way further up.
However, as prices rise and market risk increases, investors don't
have the option of earning a decent income if they choose to sit
out the rest of the cycle. That's why investing has become an
Rules of the all-or-nothing game
Here are some rules for investors in the all-or-nothing game
created by low yields and high stock prices:
Transition gradually in and out of stocks.
Large market-timing moves in and out of stocks are never a good
idea, but the contrast is even sharper now that there is nothing
to be earned by waiting on the sideline. This calls for a more
gradual transition out of stocks if you believe prices are
getting too high.
Know what you own.
A pricey market is a bad time to own stocks generically. Know the
fundamentals and valuations of the specific companies in your
Determine your risk parameters.
Know what you can't afford to lose, and keep a corresponding
portion of your portfolio in guaranteed vehicles, even if there
is little return there.
Be prepared to accept more volatility.
Stocks are the only game in town right now if you want to earn a
return, so that means
accepting more ups and downs
Higher interest rates would make this game a little easier, but
the irony now is that it would be difficult for the stock market
rally to survive a rise in rates. So, investors may not like this
game, but it seems they have no choice but to play it.