Cashing Out From Confusion

I don’t understand the stock market anymore and in the short term, I’ve decided to give up. As the Dow Jones bounces around 30,000 and the Schiller S&P 500 PE sits above 33 (average is 16), nothing makes sense to me. We are still in a global pandemic – the economic fallout of which isn’t fully understood yet – aren’t we?

I called our financial planner and asked him to sell stocks equal to an extra two year’s worth of spending last week. Increasing our cash buffer in the event of a downturn seems to be more logical than expecting the current government-stimulus fueled bubble will keep growing.

I guess a more optimistic way to characterize the move as ‘profit taking’ after a surprisingly good year. My sell MegaCorp options high, reinvest into panicked index funds on St Patrick’s Day was my best move in 10 years. Now, as the market seems ‘irrationally exuberant’ we’ll cash some equities out.

Maybe I’ll even stay ahead of a potential 2021 increase in income/capital gains taxes. It’s pretty likely that if the Democrats win one-party control of Washington DC, taxes of all sorts will be on the rise.

I’m certainly still optimistic about the market over the longer horizon. Increasing our cash position now comes at little perceived downside, since we’ll need the money sooner or later and inflation is unlikely to punish us too much in the short-term. This will put our cash position at about 3.5 years spending. I’ve been trying to keep it at 2-3 years ‘buffer’ since I stopped working.

Anyone else ‘profit taking’ before the end of the year?

Image Credit: Pixabay

24 thoughts on “Cashing Out From Confusion

  1. Like minds. Felt similar to you so recently took some profits and paid off the remaining mortgage balance this week. Today marks 3 months since wife and I left our versions of Megacorp. FIRE and Debt free heading into 2021

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    1. Congrats – As they say, paying off your mortgage does feel great, doesn’t it? In a low interest environment, people can debate the financial merits, but I love owning my own castle!

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      1. yes it does and we love knowing we own ours too. We had considered a refi to 2.5% but then decided to just get rid of the hassle altogether. Actually lowered our yearly SWR below 3% which gives us even more flexibility moving forward. We started FIRE at 60/40 stocks/fixed inclusive of a 5 year buffer in cash, CDs and short term bonds to guard against sequence of return risk, etc. Will keep as is for the next year or so til we see what a (hopefully) post-COVID world looks like.

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      2. I think when we get to late-Spring, we’ll start to have a good sense of post-CV19. By then, we should have at least half the country vaccinated and we can see how ‘normal’ the ‘new normal’ looks.

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  2. Sounds like a smart plan to increase the cash buffer. Where are you parking the cash? I found the high interest savings options have really dried up with the low interest rates.

    Liked by 1 person

    1. Agree – no good place to put $ right now. Our cash buffer is largely in a eTrade Premium Savings account. I just looked and the interest rate has fallen to 0.05% APY!

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  3. Not me, Chief. As my Navy Dad would say, “Steady as she goes.” As always, we maintain 2.5 years cash; more would sacrifice too much decline for my taste against inflation. I lean on my advisor’s guidance. In the two decades we’ve been together, we’ve increased my capital substantially, while providing ample cash-flow for our modest (yet fairly comfortable) lifestyle. Merry Christmas to the entire FIREstation!

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    1. Merry Christmas, Bowmanifesto! I’m probably not as diligent in rebalancing and maintaining our cash buffer balance over time. I let things fluctuate a bit around our goals. I should probably just ‘pay’ myself a quarterly ‘salary’ on a schedule & rebalance each time, rather than do it in big irregular chunks.

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    1. We are about a 60/40 split of stocks to bonds. Plus the cash & some fixed private mortgage investments (which are secured).

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  4. The market is totally crazy right now as evidenced by the S&P 500’s YTD Total Return of 15.54%. Ask yourself the simple question, “Are America’s businesses really 15.54% better than they were at this time last year?” The upside of things getting back to to where they were are already baked in.

    Contrast this with 2008 which had a couple year bear market. In 2010, I was able to buy Home Depot Stock which had a 4% yield and was growing the yield 20% per year. Microsoft also had a greater than 4% yield.

    I go to the gym and hear the 20 somethings, many of whom are under employed right now, making money investing in Options because normal stocks aren’t fast enough for them. You try to tell them that the past 6 months is not normal and that the market doesn’t always go up. I quote Warren Buffet’s quip, “You find out who isn’t wearing a swimsuit when the tide goes out.” They simply look at me like I am a crazy old man.

    Doesn’t hurt to have some funds in safe cash equivalents right now.

    Liked by 1 person

    1. Yes – It is a very confusing year. I thought if the S&P only recovered half of what it lost in March it would be pretty fairly valued. Up +15.54% in a pandemic only makes sense if you subscribe to the investment theory that the government will now always bailout the markets with easy money. I think that ‘tide’ is going to get washed away fast – potentially with sharp inflation.

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  5. We had a bit of a cash windfall just before our retirement in Oct (it’s part of what accelerated our FIRE!), and it’s been hard to consider investing it in today’s market given the valuations. I’ve put a chunk of it in value/dividend-oriented stock ETFs to start building my retirement income stream, but also because there’s been much less run-up in value stocks.

    Otherwise, like Brian F, we used some to pay off the relatively small balance on the mortgage and get debt-free. Feels good and produces a much better return than the cash would have! So, for now, not selling but only because I have my cash position already set for several years of spending if needed.

    As for cash savings, there are a couple of “high-yield” options that we looked at: Ally, Capital One and Marcus, all of which are yielding around 0.50% at the moment (sad that that qualifies as “high” yield!). If you’re an AARP member, Marcus has a deal where you get another 0.1% for 24 months (see https://www.aarp.org/benefits-discounts/all/high-yield-savings-from-marcus-by-goldman-sachs/).

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    1. Congrats on paying off the mortgage – that’s a great milestone! When I see these super low savings rates I remember back to the early 1980s when you could get 5.25% off of an ordinary passbook savings account. I tell my son about those rates (and the correspondingly high inflation we had) and it makes me sound very, very old!

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  6. I haven’t really increased our cash position this year. We always try to maintain 3 years of annual expense in cash (held in a HYSavings account). We maintain another minimum of 5 additional years of expenses in bonds. However, we dynamically adjust our diversification based on market conditions (I use the P/E mentioned above to make predetermined adjustments to our stock/bond splits). We adjusted from a 60/40 to a 50/50 split about a year and a half ago (pre-pandemic). Given the crazy valuation and high level of money printing by governments, I don’t see myself adjusting back into higher levels of stocks until the P/E shifts significantly back toward the average. I do periodically rebalance on big swings as my balance gets out of alignment, and just rebalanced last week when the DOW peaked near 30,200. It was the third rebalance I’ve done this year, so it’s effectively taking some profits off the table by shifting back into bonds automatically. It’s been a crazy good year for us financially, but given the super high P/E, pandemic crazed governments running unlimited printing presses, and a realistic concern for a bubble of business failures on the horizon, it just seems a little risky, so “safe-ing” some profits seems highly logical at this time. I think you made a good move.

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    1. I’m not down to 50/50 yet, but getting closer. I was thinking of your ‘dynamic portfolio diversification’ approach when the Dow / Shiller PE peaked around Thanksgiving and finally got around to a little more aggressive rebalance.

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  7. Did you take any special actions to minimize tax liability when selling? I’d like to sell more stocks but the capital gains taxes are prohibitive for me. The stock market would have to fall 40%+ percent to make it worthwhile, and I’m not gonna take that bet at this time.

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    1. I sold stock at a loss back in March (then quickly re-bought) to help with taxes, then sold my oldest holdings in December. The March losses will pretty much cover the capital gains on this sale. Besides, if the Democrats win the Senate in January, Biden has promised to push for capital gains taxes to be raised up to ordinary income rates.

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      1. I live in CA, so have an additional 13.3% tax on top of the 23.8% federal tax on cap gains. We’ll see how the Biden tax proposals turn out, I wonder if they would reinstate SALT deductions.

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      2. Minnesota’s cap gains tax rate is 9.85% – not quite as high as CA. I have to laugh that they don’t just make it an even 10%. It’s like gasoline prices that end in 9/10ths of a cent!

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      3. Just for clarity (and since CA always gets a bad rap on taxes), the 13.3% capital gains tax rate Joe quotes for CA is the state’s maximum marginal rate, and it applies only to income (from wages and/or investments) over $1M. Obviously, most taxpayers will not hit that marginal rate. For example, if you’re married and your income is a more “modest” $500K, you’ll pay at most 9.3% (the marginal rate for income over $117K), with an effective tax rate of roughly 8.2%. If you’re only bringing in $200K (a nice sum for a retiree living off investments and, perhaps, a pension), your effective tax rate is 6.4%.

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  8. We were up to 70% stocks in October due to the run up and we sold enough by both taking profits and selling losers such that most of the capital gain is offset with losses. We kept it in cash and I don’t like having that much cash but so be it. The run up since has been amazing such that we have more in equities than the gurus say we should have. We are in a good spot in that we have an enjoyable life off my pension and on top of that I earned $18,900 this year despite not having consulting gigs from March 20- September 20. I never planned on income in retirement and my wife begins SS at age 66 and 2 months in August 2021 full retirement age.

    I already have $10,000 of billable work in the first sixty days of 2021. This is enjoyable work without strict deadlines and it keeps me sharp and involved. We anticipate that we will be reluctant investors who have to make mandatory withdrawals at age 70 1/2. I know a good “problem” to have. I still listen to Dave Ramsey. We might start gifting inheritance money to children in 2021.

    Sign me grateful to my parents for teaching me how to live within my means and pay off a mortgage

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    1. It sounds like everything ‘timed’ perfectly for you this year. Strange that would be the case in a year of a pandemic, doesn’t it? I do some paid board work and occasionally some consulting as well. Just something to do and ‘fun money’ to put toward trips, cars, and tickets. Didn’t spend hardly anything in 2020, of course. Looking forward to a better 2021!

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