re: Should I move my 401k money to the cash option ahead of the election?

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It sounds like you have it all figured out. I am not saying that scenario will not play out in your favor, but if it does it will be pure luck.

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Pure luck is strong. If OP happens to be of sane mind when most people aren’t and happens to notice how horrible the underlying fundamentals of both the economy and the market are, and then decides to raise cash in his portfolio because the risk/reward of equities is no longer acceptable, that would be a very reasonable stance as far as I’m concerned. Timing the exit and re-entry will of course be difficult, but long term expected equity market returns are publicly available from some of the largest investment firms in the world.

GMO, for instance, whose work is stellar, is now forecasting a negative 5.8% annual real return for large cap US stocks over the next 7 years. Couldn’t OP just find somebody whose advice he trusts, like GMO, and wait to buy back in when that long term forecast compensates him more fairly than does a potential negative return in the face of an arguable bubble in risk assets?

LINK

Timing the market is notoriously hard. Most people will get their arse handed to them. But for a 56yo retiring in 10 years to temporarily move his portfolio into cash upon recognizing stocks feel detached from reality is not some crazy notion deserving of all the condescension he’s received in this thread. Especially if it helps him sleep at night, which counts for something.

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That is not hedging, that is trying to time the market.

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This. I have no issue with you wanting to hedge your portfolio given your situation but this isn't the way to do it.

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Pure luck is strong. If OP happens to be of sane mind when most people aren’t and happens to notice how horrible the underlying fundamentals of both the economy and the market are, and then decides to raise cash in his portfolio because the risk/reward of equities is no longer acceptable, that would be a very reasonable stance as far as I’m concerned. Timing the exit and re-entry will of course be difficult, but long term expected equity market returns are publicly available from some of the largest investment firms in the world.

GMO, for instance, whose work is stellar, is now forecasting a negative 5.8% annual real return for large cap US stocks over the next 7 years. Couldn’t OP just find somebody whose advice he trusts, like GMO, and wait to buy back in when that long term forecast compensates him more fairly than does a potential negative return in the face of an arguable bubble in risk assets?

LINK

Timing the market is notoriously hard. Most people will get their arse handed to them. But for a 56yo retiring in 10 years to temporarily move his portfolio into cash upon recognizing stocks feel detached from reality is not some crazy notion deserving of all the condescension he’s received in this thread. Especially if it helps him sleep at night, which counts for something.

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That's a fair assessment, although, even assuming GMO's forecast is correct (which is a big assumption) being in pure large cap US stocks 10 years away from retirement isn't the most prudent strategy.

If he is diversified and in the broad market, and maybe bonds, there is a good chance that he will be fine over that 10 year period and not run the risk of missing out on a bull market. Opportunity cost should play a factor in this decision.

It's the "temporary" part of moving into cash which is the problem, because you assume you'll know when to get back in, when just continuing to dollar cost average over that 10 year period will more than likely (based on historical data) provide a suitable return.

I would move it if Bidens wins!

I can only change allocations once every 2 weeks (pay period). If I had a separate account within it I could change more often but I don't because I know I would screw with it too much. I take my "gambles" in my taxable account or my IRA.

First off, your chart didn't work.

Secondly, here's some nuance for you. By using 2013, you're cherry picking. I don't have to cherry pick because I can objectively conclude that the CAPE ratio has only been as high as it is today twice in history: 1929 and 1999.

Let's assume that we never see a 1999-type overvaluation again since the market has gotten "smarter" since then. I'll give you that and instead only look to 1929.

In September 1929, the S&P500 (adjusting for dividends and splits) peaked at 31.83. Note I chose that date because the price on that date corresponds to nearly exactly the same CAPE level as we are experiencing today, so, again, I'm not cherry-picking by using that date as my starting date. It's the only option available to me as the market has only been this richly valued twice in history and I'm ignoring 1999 (which would only paint an even uglier picture).

OP said he is retiring sometime in the next 10 years, and hopefully as soon as possible. What would have happened had his grandfather employed your "buy and hold at all costs" strategy in 1929 when he was 10 years from retirement and the S&P500 was trading at today's valuation levels? Let's assume grandfather started with $100,000 and needed $190,000 in nominal dollars in retirement:

Scenario 1:

Remain invested with his $100,000 and invest an additional $10,000 each year for the next 9 years.

Scenario 2:

Keep $100,000 in cash and then add an additional $10,000 in cash savings in each of the next 9 years.

Obviously, Scenario 2 would have produced a nominal value of $190,000 in 10 years.

Here's what Scenario 1 would have produced:



So, in summary, by looking to history but conveniently disregarding the fact the stock market has only been this overvalued twice within said history is ignoring the reality that future returns are influenced by current valuations. And, frankly, comparing periods of modest overvaluations to the extreme overvaluation we are experiencing today offends common sense.

If OP wants to raise cash to protect his nest egg that he'll need in 10 years (or even less), he owes it to himself to have this kind of nuanced conversation with his financial advisor instead of just holding his nose and plowing more in at some of the richest valuations in history.

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I didn't cherry pick anything. As I stated, I chose March 2013 because February 2013 was the last time the Shiller CAPE Ratio was below the average level as measured since 1980.

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Right, but you're comparing a period of modest overvaluation to a period of extreme overvaluation. That's like saying Louisiana usually doesn't flood during storms while ignoring what happens when it's hit by a Category 5 hurricane. If you haven't noticed, we're not in Kansas anymore.

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If the market has gotten smarter since 1999, it has certainly gotten smarter since 1929. Who is cherry picking now?

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How am I cherry picking by simply observing that the CAPE is at the exact same level today as in 1929? That's not an opinion; it's a fact.

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Additionally, I'm not sure where you are getting your information. For apples to apples, I am using the data provided by multpl.com found at LINK

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I linked my source in the post you originally responded to, which is the same source that you just linked to. In 2013, the CAPE never exceeded 25. It's currently at 30.

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Going back to 1871, there have been 79 times where the ratio was above 30, where it is now. Going back to 1980, a more reflective time frame, the number is 77. So there have in fact been 77 times where the ratio is higher than it is currently.

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Not on any sustained basis; again, see link:

LINK

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More telling, there have been 252 months since 1980 where the ratio was above the average of 22.39, which would be considered overvalued.

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Again, if the ratio was at 23, we may be having a different conversation. But it's not at 23; it's at 30.

The average Shiller CAPE ratio for that July 2013 to today has been 27.9. Where is your threshold for "extreme overvaluation"?

If the 1929 period is your yardstick that qualifies as a sustained period, nearly every one of those 77 qualifies, as the ratio was only above 30 for 2 months in 1929.

I don't know what to tell you. Overvalued means exceeding the average value in this case. But I will play along as this will be my last post in this thread because I feel like it is getting derailed.

The Shiller CAPE Ratio was spot on 30 July 1st 2017. I chose that date because the most recent time before that it was 30 or higher was March of 2002.

From July of 2017 till today, the ratio has averaged 30.14, and only dipped below 25 in one month out of 41.
The S&P 500 total return for that time frame was over 44%. Again, what could be life changing amounts of money.

Starting valuation matters, but what you are advocating is timing, and the CAPE ratio is a poor signal for timing, as it turns out most things are.

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The average Shiller CAPE ratio for that July 2013 to today has been 27.9. Where is your threshold for "extreme overvaluation"?

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And in July 2013, the CAPE was at 23. But the OP is not asking about what he should have done in July 2013. He's asking if he has any reason to be cautious today, with an outlook not to exceed 10 years and potentially even much shorter, when the CAPE is at 30.

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If the 1929 period is your yardstick that qualifies as a sustained period, nearly every one of those 77 qualifies, as the ratio was only above 30 for 2 months in 1929.

I don't know what to tell you. Overvalued means exceeding the average value in this case. But I will play along as this will be my last post in this thread because I feel like it is getting derailed.

The Shiller CAPE Ratio was spot on 30 July 1st 2017. I chose that date because the most recent time before that it was 30 or higher was March of 2002.

From July of 2017 till today, the ratio has averaged 30.14, and only dipped below 25 in one month out of 41.
The S&P 500 total return for that time frame was over 44%. Again, what could be life changing amounts of money.

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Sustained = remaining at or near the beginning level for a period of time sufficient enough to provide the investor with a return that beats cash over his/her investment horizon. I've previously shown the 10-year outlook would have sucked wind in 1929, when the CAPE was equal to today. I can run a similar analysis for the late 1990s, but we both know that result would be even more depressing than what we saw from 1929. Will a 10-year outlook beginning in 2017 perform well? Time will tell. Will it perform well beginning in 2020? Time will also tell, but rather than parrot mindless aphorisms that any schmuck at Edward Jones is sure to learn on Day 1, I'm simply saying it is entirely reasonable to demand more in terms of investment advice. After all, not only are we at near-peak valuations, we're at peak debt-to-GDP, all-time low interest rates, all-time high political dysfunction, multi-decade low corporate taxes and peak or near-peak fiscal policy. All of those factors should lead an inquiring mind to consider strategies that might protect oneself, particularly if they are only 10 years or less from retirement.

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Starting valuation matters, but what you are advocating is timing, and the CAPE ratio is a poor signal for timing, as it turns out most things are.

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Nope, what I'm advocating for is the elimination of ridiculously broad brush strokes in these types of threads. I've explicitly highlighted multiple times that buy and hold has been a winning strategy the majority of the time. I'm simply saying that anyone with an investment horizon as short as the OP's should go into his twilight working years as wide-eyed as possible. We're at valuation levels that have historically resulted in poor risk-adjusted returns for stocks, and that's relative to prior periods when the Federal Reserve and Federal Government each had much more monetary / fiscal capacity available at their disposal.