Should You Move to Cash When Markets Hit All-Time Highs? (EP.227)

0:28We all need to make smart decisions with our money. breaking records in 2025, and valuations have risen to a level we haven't seen since just before the peak of the dot-com bubble in 1999-2000. But what was really interesting, to me at least, is that the media request for this topic came just minutes after I received a text about the same thing from a worried investor. So I'm guessing that more than a few people are wondering, with markets at all-time highs and so much uncertainty, is now the time to move some money to cash. I will link to the full story in the show notes at thelongterminvestor.com.

1:05If you haven't been there before, there's a place to sign up for my newsletter. There are all sorts of charts and extra resources, so be sure to check that out. Now, I wanna point out something that will probably be obvious after I say it, but when you pair a scary narrative with a factual statement, like the stock market is at all-time highs. That's exactly the type of headline that's going to garner attention and lead to more clicks and more advertising revenue. What you may not really realize is that the S &P 500 has already made 28 new highs this year, and last year it made 57 new highs. I stumbled across a pretty good chart from a group called Clearonomics that gives you a nice historical look at the number of S &P 500 all-time highs each year.

1:51And I'll put that chart in the show notes at the long-term investor.com. And I think what's important to remember is that when you invest in the stock market, you're used to seeing those prices go up and to the right. So new all-time highs is very normal. And even the USA Today article rightly points out that it isn't a reason to panic. Instead, they point to valuations or the price that investors are paying for stock index fundamentals. Specifically, the article references the cyclically adjusted price-to-earnings ratio, or CAPE ratio, which currently stands at 39 for the S &P 500. Typically, the price-to-earnings ratio, known as the PE ratio, looks at the price investors are paying for 12 months of earnings.

2:34And so the CAPE ratio, popularized by Nobel laureate Robert Schiller, uses a decade's worth of inflation-adjusted earnings to give a longer view of valuations, not just one single year of nominal earnings. The thing about valuations is that they are relevant to long-term returns because the higher price you pay for earnings, the lower your expected long-term returns. But valuations are notoriously bad short-term indicators. In fact, one of the first articles I published at PlanCorp in April 2015 was titled, very imaginatively, Valuations and Return Expectations. And I'm going to link to it in the show notes at thelongterminvestor.com, and it offers a detailed analysis of long-term returns whenever the CAPE ratio was over 25.

3:22And I want to share an excerpt from that article, again published just a little over a decade ago. Quote, valuation is a terrible market timing tool. Market valuations tend to stay at relatively high or low levels for extended periods of time, but they're useful in setting expectations. Current valuation suggests that stock prices are vulnerable to unexpected shocks, and long-term returns have an increased probability of trailing historical average returns. Still, we expect market exposure to continue delivering higher long-term returns than fixed income alternatives or cash. End quote. Honestly, I feel the same way today as I did 10 years ago.

4:04Think about this. That analysis a decade ago was focusing on periods in which the CAPE ratio was over 25, and today it is nearly 40. So I think it's fair to wonder what's going on. And I do want to dig a little bit into today's stock market valuations, as well as the AI-driven leadership. If there's one drum I've been beating all throughout 2025, it is the importance of earnings. And corporate earnings continue to surprise the upside, and profit margins remain strong, something that has just seemingly been true since coming out of the financial crisis. And when you add in the fact that balance sheets look healthy, and that corporate guidance has been far more optimistic since the beginning of the year, when tariff policy was clouding the ability of any business to make any sort of projection about the near-term future.

4:51When you think about all those things, it's pretty easy to see why investors are bidding up prices. Oh, and I didn't even mention the Fed rate cuts. I mean, that only helps the narrative. So I think really what has investors on edge is just all the talk about how we might be in an AI bubble. Now, there's a gentleman named Cliff Asnes, who is one of the most respected researchers in quantitative investing, and he has my favorite definition of a bubble. It's actually pretty simple. He says that a bubble is when valuations are so high that no reasonable future outcome can justify current prices. So are we in an AI-driven bubble?

5:31There's a quote from my current working draft of The Perfect Portfolio, which you can pre-order, by the way, on Amazon. And this quote feels appropriate. It says, quote, innovation will always excite, excitement will always invite speculation, and speculation, unchecked, will always end in pain. The perfect portfolio doesn't ignore innovation, but it engages with it through disciplined diversification, ensuring history's lessons temper today's euphoria. End quote. I don't think stock market prices are so high that no reasonable future outcome can justify these current prices, but I am almost certain that when we look back on today, maybe 10 years from now, we will see that a lot of money poured into some bad AI bets.

6:19But for now, the strength of earnings in the US isn't just an AI story. Yes, there is leadership that is very concentrated, but earnings growth has broadened across sectors with even the cyclical areas contributing alongside tech these days. But we're really getting pretty technical here with the earnings stuff, here is the problem with going to cash in your portfolio, even just with a small portion of your portfolio. Obviously, it'd be great to miss the downside and get back in before things rebound. And as I noted in USA Today, the problem is that you have to be right twice, once when you get out and once on when to get back in.

7:01Predicting the future we all know is impossible, so hoping to predict it correctly twice in a row is a pretty big ask. And I want to dig into both of these instances where you have to be right. So first, let's say you choose to get out now. The opportunity cost of being wrong is very high because the market can go years without a meaningful downturn. And speaking of which, what even is a meaningful downturn? If you're going to cash, what are you trying to avoid? Are you trying to avoid this 10 % drop or a 20 % drop or a 30 % drop? And I think that's really important to ask because the market falls 10 % roughly every 12 months.

7:40So I'm not sure avoiding that type of drop makes sense. That's just the cost of higher expected long-term returns the way I see it. And I honestly sort of feel the same way about 20 % drops, which happen on average roughly every three years or so. And I'm intentionally using some round numbers here. We actually nearly had a 20 % drop already in 2025. It was 19 point something. And so we're basically there and we've already recovered and some. Now the 30 % drops, the 30 % or greater drops, those happen about once a decade. And yes, avoiding one of those would undoubtedly be great, but you could be waiting a long time, which brings me to the second time you have to be right.

8:23How do you even know when to get back in? So let's say you actually did nail it, but you're just sitting around waiting. And I've witnessed, I don't know, maybe a dozen investors over my nearly two decade career who went to cash and didn't get back in when markets were down. Because when the market is down 10%, it feels like it might decline to 20. And when it's down 20, it's easier to talk yourself into the idea that it'll drop 30%. But here's the thing, not once have I witnessed an investor make a timely reentry into the market. And some people, maybe most people, but definitely some people never really fully get invested ever again.

9:02And I have to say the amount of anxiety that comes with the decision just to reinvest the cash always seems much harder, like an order of magnitude greater than just staying invested through all the market's ups and downs. So I think what I'm trying to say here is that market timing is emotionally satisfying in theory, but punishing in practice. You need to be right twice on when to get out and when to get back in. And that second decision I'm telling you is almost always harder. Meanwhile, markets can advance meaningfully from prior highs because earnings keep compounding. And the data shows that sitting out waiting for a quote better entry point often means that you never really get that compounding that you were investing for in the first place.

9:49So the better question if you're asking yourself about going to cash is probably is my allocation appropriate and am I executing it consistently? A quick actionable checklist for you. If you are tempted to raise cash because of an all-time high plus any sort of narrative of the day, let me offer you this quick checklist to run through. I think you need a purpose check. So ask yourself, do I need this money in the next one to three years? If yes, I think it is fine to have cash and short-term bonds for that need. If no, you need to keep that money in growth assets. I don't feel like I'm making a big stretch here.

10:26You probably do not need your whole portfolio to spend in the next one to three years. So that's the purpose check. The policy check. Am I off my target allocation by more than my rebalancing bands? If yes, rebalance. Honestly, there's no problem with that. That's part of the plan. The process check, the next step, the process check is if new money is hard to commit, can I dollar cost average over the next, say, three to six months to stay on schedule? And lastly, on this quick checklist, I have what I would consider to be the behavior check. Am I reacting to headlines or following my written plan?

11:04All-time highs and uncertainty can coexist. They usually do. And valuations do deserve respect, not fear. Earnings deserve more credit than they're getting, And I think ultimately it's your plan that deserves to be executed with calm consistency. Markets will always give us reasons to hesitate. Your job is to keep your process stronger than your emotions. If today's episode was helpful, the best way to support the show is to leave a quick rating or review. It helps more long-term investors just like you find these conversations for themselves. As always, thanks for listening. And until next time to long-term investing.

11:47Thanks for listening to the Long-Term Investor Podcast. To access free financial resources and submit questions to be answered on the show, visit thelongterminvestor.com. Peter Lazaroff is an employee of PlanCorp and BrightPlan. All opinions expressed by Peter and any podcast guests are solely their own opinions and do not reflect the opinions of PlanCorp or BrightPlan. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Clients of PlanCorp and BrightPlan may maintain positions in the securities discussed in this podcast.