The S&P 500 hit a high around 1,670 in May (May 12, 2013). Since that high was set, or in the past 4 months, stocks have been very volatile, dropping as low as about 1,570 in June, and rallying as high as 1,710 (August 2nd). However, with today’s close of 1,688, stocks have, at least as of today, added just 18 points in the past 4 months, or 1%. Given the sizable risk in stocks, as evidenced by the volatility we have experienced, the risk/reward relationship does not appear favorable, to put it mildly. Going forward, we are entering what has historically been the worst period each year for stocks – September and October. Given the relatively expensive valuations, the possibility (or probability) of Fed tapering, and all of the other widely reported challenges and risks, putting more money into stocks right now seems foolhardy at best.
For some investors, holding cash may be very difficult. It may seem like the market is leaving us behind. However, one need only look at the performance over the past four months to see that being out of the market has not been costly. On the contrary, returns have been minimal and risks have been exceptionally high. My best advice continues to be – hold cash and wait for lower prices and better valuations. If we get past October without any major correction, I will reassess my position, but for now I am very comfortable sitting on the sidelines and protecting portfolios from potential downside risk.