If interest rates have bottomed, then time may not necessarily bail investors out of paper losses, since interest rates would need to go all the way back to new lows.
Professional money managers, who do not have the same loyalty to stocks that individual investors have, would be very quick to sell these blue-chip stocks. Then there is something called regression to the mean—stocks typically revert back to their longtime P/E ratios. The 12-month forward earnings for each of the S&P 500 sectors shows that forward P/E ratios are at cyclical highs for every sector with the exception of telecom, according to Yardeni Research. Since these sectors are currently way above their long-term P/Es, a regression to the mean would mean lower stock prices.
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For my boomer and senior clients, I would rather take profits and spend down some principal on living expenses than risk losing a lot of principal due to the above arguments, which I believe are very compelling. In other words, earning nothing on cash is OK for now, for a bigger chunk of your portfolio. I am not suggesting a wholesale "sell everything!" Simply, reducing exposure to these sectors after such a mighty run-up is prudent. One may certainly reallocate to other sectors, depending on one's age, risk tolerance and goals.
I'll end this article this way. There is an acronym that is very popular these days: T.I.N.A. It stands for "There Is No Alternative" to stocks since interest rates are so low, so investors have to keep plowing their money into the same dividend-paying stocks regardless of how much they have risen in price. Well, I'm here to tell you that there is an alternative: cash. This may be heresy for professional money managers, but at this time, it makes total sense for individual investors who are of boomer and senior age.
—By Mitch Goldberg, president of ClientFirst Strategy, an investing firm @Mitch_Goldberg
Read more from Mitch Goldberg on the markets and investing.