Should I hedge stock investment because it's "overheated"?

Bostonerimus1

https://forums.moneysavingexpert.com/discussion/comment/82050718#Comment_82050718

The OPs question struck me as one that referenced their current circumstances rather than a general discussion about investing after historical rises in stock prices. So some information abut the OP seems very relevant. If they are not expecting to use their cash within the next 10 years then the generic advice would be to invest it in a portfolio of stocks and bonds. Whether current stock market highs make that a good idea is way beyond my pay grade to know.

Bostonerimus1

OP, with personal assets of 2M a cash allocation of 250k isn’t outrageous. No one can tell you if it’s a good idea to buy into stock markets right now, but IMO the steep recent rise in stock markets, the levels of debt and the probability of interest rate rises to control inflation make it an unusually risky time to be buying into the market.

beeza650

I need to match house price inflation at a minimum. I will retain a cash/near cash portion, the 250k is after I have taken that into consideration. My age doesn't really matter. It's the spend horizon which is about 10 years and even then I might be able to get a mortgage if stocks are really down

masonic

If you can be flexible with timing, then you can afford to take more risk, as a badly timed crash can be waited out. I took this approach about 15 years ago (having held in cash the 5 years prior to that), with no clear time horizon, and ended up using the money this year. I needed a decent amount of growth to build up my fund. Markets were very kind to me indeed, but YMMV.

PixelPound

https://forums.moneysavingexpert.com/discussion/comment/82051256#Comment_82051256

This is where a "bucket strategy" can be useful

Bucket 1: Long Term. This is 100% equities invested for long term growth, to be drawn from in good years

Bucket 2: Medium Term: This is low volatility dividend stocks, bonds, etc

Bucket 3: Short Term. This is cash or cash-like. Think accessible HYSA and MMF

In boom years money can be withdrawn from Bucket 1 so long as the balance is above how the previous one ended. In years the market is down you don't touch Bucket 1 instead using Bucket 3, and dividends from Bucket 2.

In good years you can also use Bucket 1 to top up 2 & 3 if they've been used in the previous years. etc

masonic

https://forums.moneysavingexpert.com/discussion/comment/82051799#Comment_82051799

While that makes sense as an ongoing income strategy, I'm not sure it is applicable to a single large expense like buying a house.

Bostonerimus1

https://forums.moneysavingexpert.com/discussion/comment/82051799#Comment_82051799

I've never appreciated the chronological bucket strategy. It's just a time filter you apply to asset allocation and IMO just another way to package asset allocation so that Ray Lucia et al can make money.

aroominyork

https://forums.moneysavingexpert.com/discussion/comment/82052207#Comment_82052207

It seems logical to me. If you want the maximum possible in equities while still having enough the pay the bills in market downturns, it helps you plan your asset allocation. Sure there are other ways to skin that cat, but it's an easy way to view the situation and, for some people, will be very practical. Maybe not for you.

megatower

https://forums.moneysavingexpert.com/discussion/comment/82051256#Comment_82051256

Your timings have been perfect! Riding up most of the bull run and cashing out when it's frothy

masonic

https://forums.moneysavingexpert.com/discussion/comment/82053028#Comment_82053028

Well I could have moved to equities more quickly after the global financial crisis, but other than that I was lucky. Time will tell whether I had a lucky escape by converting equities into "house". From here house prices could fall and equities continue their trend, who knows.