Is This the Top?


Here are some better questions to ask yourself:

Have scary news headlines, market valuation techniques, pundit predictions, geopolitical events or your gut instincts ever worked as legitimate market indicators in the past?

Should picking tops in the market even have a place in your investment process?

Do you have a reliable signal, based upon the weight of historical evidence, that will tell you when to get out of the market?

Do you also have a reliable signal that will tell you when to get back in?

Do you have the discipline to follow-through with such a strategy?

What would you regret more: Missing out on a further 30% gain if you sold now or taking part in a 30% loss if you didn’t?

Do you consider your time horizon before making important investment decisions?

What if you’re wrong?

How have things working out for that guy who called the last crash who’s been calling for another one ever since?

How many people have become famous in financial circles for being right once in a row?

Do you know how many TV gigs and investment conferences it’s worth to call a market top or bubble?

Do you find youself paying more attention to pundits and investors who speak with a sense of certainty about an uncertain future because it gives you an illusion of comfort and control?

Have much time do you spend worrying about daily economic data releases?

Remember when the dollar was supposed to collapse as the world’s reserve currency?

Or gold was supposed to go to $5,000 an ounce?

Or the Fed was going to cause hyperinflation?

Or we were certain to witness to a double dip recession?

Do you spend too much time worrying about low probability events that are completely outside of your control?

How many times over the past few years have you thought to yourself: ‘This has to be the top, there’s no way stocks can go any higher’?

Have you missed a huge rally in stocks because you were worried about a 10% correction?

Or have you already forgotten what it’s like to experience a large loss?

How will you react if we do see a significant drop in stock prices?

Are you mentally prepared for the next time we see a 10% correction? A bear market? A market crash?

Do you have an investment plan in place?

That you can and will follow?

No matter what everyone else around you is doing?


Further Reading:
The Psychology of Sitting in Cash



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What's been said:

Discussions found on the web
  1. connecting.the.dots commented on May 19

    […] math behind a bear case on equities that says prices have outrun reality.”  Meanwhile, here are some better questions to be asking yourself.  Also, what if everything started to go right in the world […]

  2. Jim Haygood commented on May 19

    The top will occur when Dr. John Hussman either goes 200% leveraged long, or else climbs out on the ledge of his building and threatens to jump.

    No capitulation yet: he’s still ‘hard negative.’ Therefore, the market must go up.

    • Ben commented on May 19

      Ha. Still has $800 million or so in AUM. I guess he has a diehard investor base.

    • Mark Massey commented on May 20

      Very funny stuff. Hard to believe he has $800 million under mgmt. He has literally lost money for all of his investors over past 6 years while the S&P 500 has risen 2.5 times from its low. My go to guy for investment advice is Paul Ferrell over at MarketWatch. He is the very best! (hahaha).

      • Ben commented on May 20

        Yeah, I’m just waiting for Ferrell to tell everyone he’s just been kidding this entire time. He can’t believe what he writes, can he?

  3. Jim Clark commented on May 19

    Calling tops is rather useless if you can’t call bottoms

    I made the mistake of getting panicked by the bear market of 1974. Sat out for decade before coming back in and saying “never again”. When I’ve sold, it’s been because I needed the money.

    • Ben commented on May 19

      Great point. I’ve heard from a number of people who counted their lucky stars that they sold out and missed a large chunk of the 07-09 crash but could never bring themselves to buy back in.

  4. John Thees commented on May 19

    Great article. Hopefully readers will agree and not try to call the top or bottom. Personally I will accurately call when the the top occurred after the market falls 20% and becomes a bear market. That’s when I will start using my cash reserve for expenses and buying into the market ratably over a one year period no matter what the market continues to do at that time.

    • Ben commented on May 20

      Good call. It only matters if it affects your portfolio or spending levels personally.

  5. 10 Wednesday AM Reads | The Big Picture commented on May 20

    […] This the Top? (A Wealth of Common Sense) see also BAML: Investors Are Cooling on U.S. Equities (MoneyBeat) • Act Local, Solve Global: […]

  6. Paul LaVanway commented on May 20

    Two thumbs up. As Jack Bogle so appropriately said, “After 50 years in this business, I do not know of anybody who has done market timing successfully and consistently. I don’t even know of anybody who knows anybody who has done it successfully and consistently.”

    • Ben commented on May 20

      Yup, risk management over all else and then let everyone else argue about calling tops and bottoms.

    • Ben commented on May 20

      Ha. Nice Kool-Aid pic. You’re still claiming credit for that one right?

  7. Mark Massey commented on May 20

    Little known fact: Milas Kunis is a investing savant!

    • Ben commented on May 20

      I wonder if it’s rubbed off at all on Ashton…

  8. awakeinwa commented on May 21

    short of end of world, there is no bottom.

    And if one has 3 years worth of liquidity to withstand a financial crisis level recession, there is no top either.

    • Ben commented on May 21

      Yup. I always tell people nothing has ever ended badly if you never sold because all-time highs mean stocks have literally come back every single time. It’s all about defining your time horizon.

  9. CG commented on Jun 25

    Great post. Should current market valuations be a consideration in an allocation plan? Say, when PE10 is above (or below) some threshold you might consider a shift from stocks to bonds (and vice-versa)? Or, is that simply market timing that has no basis… Equities sure look expensive today (PE10 is 63% above it’s mean), and history has shown that wealth building when PEs are high result in lower long-term returns.

  10. TheDailyGold commented on Mar 09

    Gold’s bear market is over and more importantly, Gold/Stocks ratio has broken its downtrend and recently touched 2.5 year highs. I’d much rather own Gold than US equities which continue to be extremely overvalued by a variety of valuation indicators and are trading below major long-term moving averages. It could take another 5 years before US stocks become a reasonable investment. The high valuations and extremely poor long-term returns outlook have been repeatedly warning investors of the tough road ahead.

  11. WorkingStiff commented on Mar 10

    I think CAPE is a useful tool for understanding roughly how pricey the market is or isn’t. In general buying stocks when they are expensive probably isn’t going to work out very well return wise. I buy individual securities, but I also use CAPE levels to determine a rough percentage I will hold in bonds/cash. I use Graham rough rule for of 25-75% equities based on price levels. I still work to find individual under priced assets, but I limit the percentage of funds invested in equities based on CAPE levels.

  12. Lucas commented on Mar 15

    I sold everything in 2014. The market has been mostly sideways since then, so I am not going to worry about the money I may have left on the table. I did buy some stuff at great discounts last August and also more recently, but honestly most of my money is in cash right now…