Boomer Stock Investors, Time to Sell!

My neighbor stopped by coming home from work last week and we started talking about the economy, investments and retirement. She is 52 years young and fully invested in mutual funds. That caught me by surprise. I asked myself, do Boomers understand the risks of being 100% invested in stocks right now? So here goes, 3 reasons why Boomers should sell some, most or all their stocks and exit the market all together!

Buy Low, Sell High

I remember the first time I asked someone about making money in the stock market. My 8th grade teacher, Woody Woodward, he smiled, picked up a piece of chalk and walked to the chalkboard. He wrote down 2 numbers and subtracted one from the other. He turned to me and said 4 words, “Buy low, sell high!” Take a look at any of the major stock indexes (see the DJIA below) and repeat Woody Woodward’s four syllables!

Bull Run its Course

Trying to predict the stock market short-term is just about impossible. Will the DJIA go up further, probably, yes. But will an investor know when it has peaked and sell, probably, no. So let's take a look at some macro cycles and the DJIA after adjusting for inflation to gain some insight into where we are today, relative to historical trends.

• Even with record levels of "quantitative easing" our economy remains in the doldrums. It certainly is not 1996, when the US economy fueled by huge Y2K infrastructure investments achieved several consecutive 4%+ GDP years and full employment.
• After adjusting for inflation we can see the DJIA has hovered around its trend line (inflation + 2%) over the past 4 years. It's not 1982, when the DOW average was nearly the same level as it was in 1962 (see below.) Frankly, where's the bull?
• Cumulative US debt increased to nearly $20T in 2014, up from $5T in 2000. In nearly every period following a significant increase in annual deficit spending the US economy has experienced high levels of inflation.

Never before has the federal government and Federal Reserve spent and pumped so much money into the US economy to maintain prosperity. A day of reckoning is certain to come. To gain additional perspective, see my recent blog (3 Converging Macro Cycles...) that explains how converging cycles including inflation, aging Boomers and globalization will work against US economic growth over the next 20 years.

Running Out of Runway

Many investors adhere religiously to their financial adviser's advice: stay invested, ride it out, the market always rebounds, you can’t time the market, etc… That might work for 20 to 30-year-old investors but for Boomers, it's a very risky strategy. Why? Because it can take the DJIA decades to regain its value from a previous high. From 1930, it took the DJIA 30 years to regain its value. From a high in 1966, it took another 30 years, until 1996, for the DJIA to regain its previous value. How would another inflationary period like 1964 to 1984 impact a $1M stock portfolio in 2014? At 3% annual inflation and a DOW around 16,000 in 2034, the real purchasing power of the portfolio is reduced to $544K!

What’s Next?

First, the standard disclaimer, if you have a system for investing in stocks that consistently beats the DJIA then you are all set! For us average investors and especially Boomers, it's time to sell those stocks and mutual funds and lock in profits. I believe this "bull" has run its course. What's next? If history repeats, several years of high inflation and several more with a flat or declining DJIA. And then, the greatest bull market of the 21st century!