The stock market has been on an amazing 8.5 year upward trend that is called the second-longest Bull Market run in Wall Street history. Starting after the precipitous drop in 2008 and bottoming out in March of 2009, the current Bull Market run has posted average annual returns of +13% and total growth of almost 200%. The tech-heavy NASDAQ has done even better – up on average +21% a year over the same 8.5 years, or +277% over the whole period.
These are truly amazing numbers, partly driven by how low things fell during the start of the Great Recession, when the S&P 500 lost 50% of its value. Still, the market has recovered all of the losses, and doubled again since that Bear Market. No doubt if you invested spare cash in the market back in March of 2009, you would be very pleased with your results.
We haven’t played the game of hoarding more cash when the market is way up and investing after a drop. It makes sense conceptually, but the returns all depend on very fortunate timing. A year ago, I was also writing that the Bull Market Run might be running its course, but it is up almost 20% since then. If I had sold out some stock at that point to carry extra cash, I would have missed out on all of the growth that has come with the so-called ‘Trump Bump’.
While I remain nervous about how high the market has soared on the Bull Market, we are am still keeping about 2.5-3 years spending available in cash. That’s what we kept on hand when we early retired 18 months ago and still seems prudent. My thinking is that the market is too unpredictable for us to not carry that insurance. Additionally, we still have stock options that HAVE to be sold on a schedule – so that has added to our risk.
While I would love to effectively push cash in-and-out of the market with the ebb-and-flow of its performance, there is too much volatility from year-to-year for us to feel like that is a workable strategy. I want as much in as I can all the time – but not so much that I don’t have enough cash on hand to weather any storms that come our way.
Do you try to time the market with cash? Have you been consistently successful?
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MrFireStation 
As you know, Chief, I am one of those fortunate 2009 investors. However, those were very unusual circumstances and that was a very unusual action for me to take. I was not trying to “time” the market then, nor now. It was just too big a dip to pass by without putting a small part of my limited “speculative” capital to work during a period of general panic. My investment time horizon is decades; I do not try to “beat” the market, nor “time” it. Rather, I invest for the potential of long-term gains that mimic long-term market trends and fundamentals, diversify broadly, spread risk factors purposefully, and place as little risk on principal as possible in order to achieve my goals if possible. Bulls are inevitable. Bears are inevitable. Patience is somewhat rare during intense market fluctuations. Exercising that trait has been good for me.
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Well, you certainly timed it well. I’ve been good at the second two parts of your equation – I’ve stayed patient through the downturns. Maybe the next one will get me, but hopefully my cash-on-hand will keep me even tempered.
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All depends on (1) how long your time horizon is; (2) how much experience you have dealing with downturns; and (3) who advises you. If all are aligned, it makes it easier to maintain a steady course in rough seas.
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I definitely do not try to time the market, but I found myself in circumstances this year as if I had. I had no less than 4 stocks in my portfolio that were bought out, which really increased my cash on hand. I did stop to think about whether I should leave it there, because these deals were telling me things were getting hot. But after some searching, I found new homes for all that cash (3 different companies, new to my portfolio, in addition to some purchases of existing holdings). All the companies are doing very well, and 2 of the stocks’ returns since I bought (just May / June timeframe) are almost embarrassingly good. Even in a market this high, there are unloved companies.
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Good to hear that there are still deals out there to be had, Matt. The market run seems to good to be true at this point, but my Financial Advisor tells me that they are supported with strong earnings growth so far.
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Yup, tried it a few times and failed miserably. Everything that is a buy and hold in the portfolio has done so much better! Can’t recommend doing it 😉
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Good to learn from your experience. Buy & hold has been our strategy into FIRE. We’ll stick with that plan!
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That does indeed seem to be the best thing to do.
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I think market timing is next to impossible. I think no matter what you set an asset allocation and stick to it. If you can’t sleep at night then your asset allocation is most likely to aggressive. What is your asset allocation besides the large cash reserves you have? Which I think is great!
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We are about 65% equities, 25% bonds/fixed loans, and 10% cash. Some of the equities are in stock options and very volatile. Separate from this is our house. Our Financial Advisor would probably like to see us a little riskier in the overall mix, but not by a lot.
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Is your home paid off?
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Yes – about 5 years before early retiring.
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