Markets Are at All-Time Highs: Time to Sell?

Economies are slowing, interest rates are falling, and the market is higher. Is it time to exit positions like iShares S&P TSX 60 Index ETF (TSX:XIU) today?

| More on:
Clock pointing towards a 'sell' signal

Image source: Getty Images.

The age of easy money seems to be back. Central banks have stated that monetary policy is going to remain easy for the foreseeable future. This has been great for stocks, which have begun to hit new highs almost daily, as investors jump back on the equity bandwagon.

This has caused me to ask myself: Is it time to sell? All these gains could be gone … should I get rid of my shares or hold on for the income?

Don’t sell because markets are hitting new highs

While seeing the market reach new highs can make it seem like it is time to sell, the fact is that markets can go up for a long time before starting to fall back. This fact has bitten me in the past. Expensive valuations and a rising stock market do not mean that the market will inevitably fall. In fact, a rising stock market can feed on itself, with the fear of missing out driving stocks to new, extraordinary valuations.

I am inherently cautious, so I am always tempted to sell out of the market as it begins to climb to new highs. I do not like to lose money. But investors need to keep in mind the opportunity cost of selling. While you do lock in past gains, you also will sell the potential upside the stock market may still have in store.

At the moment, iShares S&P TSX 60 Index ETF (TSX:XIU), an ETF which consists of the largest Canadian companies, is sitting around its all-time highs. It is the oldest, most liquid Canadian stock ETF listed on the TSX. Since it contains most companies that average Canadian investors will hold, it makes a good proxy for the state of those component companies.

At its highs, is it worth selling? Investors should look at their stocks, whether it is a broad basket of companies like the XIU or an individual stock, and decide if it is getting expensive. In the case of XIU, it appears to be reasonably priced at the moment. The ETF has an average P/E of around 15 and a distribution yield of about 2.85%. It is not cheap, but it is not overly expensive either. At this point, you could hold, but conservative investors might consider taking a little off the table.

It pays to have a plan

If you decide to sell, have a plan for how to do it. You could just sell everything and save a little on commissions, of course, but this strategy is a good way to sell at exactly the wrong time. You’d have to be enormously lucky to get it right and ride it all the way down to the bottom to buy again. Repeating this feat is even more difficult.

Instead, there are a couple of different methods to lock in some gains while continuing to ride your shares higher. You could sell covered calls on a portion of your holding, say 20% of your total shares, until they sell. That way, you gain premium income in addition to dividends while you wait.

You can also use a tight trailing stop, perhaps 5-15% below the opening stock price. If you are using an index, like XIU, you will not have the volatility of an individual stock, so you should have time to adjust your stop before the stock sells if you change your mind on selling. Move the stop upwards as the shares continue to climb higher.

Personally, I have the philosophy of waiting until a stock doubles in price before I decide to sell. If I get lucky, and the stock shoots up in a short period of time, I will also get my money back as quickly as possible. After that, I just let the remaining shares ride or buy back in on a notable pullback.

Remember: It’s almost always easier to see when to buy than when to sell

For some reason, it is always easier to know when to buy than to sell. Have a plan to sell. Whether you use options, trailing stops, or set a defined return, having a plan is a great way to keep yourself from selling at the wrong time.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Kris Knutson has no position in any of the stocks mentioned.

More on Dividend Stocks

Dividend Stocks

3 Expensive TSX Stocks I’d Buy if They Took a Dip

Three relatively expensive large-cap stocks are on my buy list if their prices dip in the next market correction.

Read more »

Silver coins fall into a piggy bank.
Dividend Stocks

How I’d Invest $1,000 in October to Generate Passive Income for Life

You can earn reliable passive income each year by investing $1,000 in this Canadian dividend stock right now.

Read more »

Businessperson's Hand Putting Coin In Piggybank
Dividend Stocks

TFSA: Invest $45,000 in These 3 Stocks and Get $2,392 in Passive Income

Here are three of the best Canadian dividend stocks TFSA investors can consider buying right now to earn handsome passive…

Read more »

Modern buildings in business district
Dividend Stocks

3 REITs Offer a Good Mix of Growth Potential and Dividends

The real estate sector in Canada is still heading downwards, and the stocks are mimicking the pattern, so you can…

Read more »

potted green plant grows up in arrow shape
Dividend Stocks

2 of the Best Dividend Stocks to Buy for Growing Passive Income

If you're building a long-term portfolio, these two dividend stocks are some of the best investments to buy for growing…

Read more »

edit Woman calculating figures next to a laptop
Dividend Stocks

Create $500 in Tax-Free Passive Income With $0 in the Bank

Even if you don't have a cent to invest, you can start creating passive income to allow you to create…

Read more »

Dividend Stocks

Passive Income: 2 Dependable Dividend Stocks to Buy Today and Own Forever

Now’s a great time to think about building a passive-income stream. Here are two dividend stocks to have on your…

Read more »

Dividend Stocks

3 Dirt-Cheap TSX Stocks (With +5% Yields) to Buy Right Now

Here are three dirt-cheap TSX stocks that trade with elevated dividend yields and solid growth prospects ahead.

Read more »