Nine years of record low interest rates, an improving economy, and few high yielding investment alternatives, have propelled the U.S. stock market to record highs. For example, the current price-earnings (P/E) ratio of the Standard & Poor's 500 (S&P) stocks collectively is 24.5. This indicates that stock investors are paying $24.50 for each dollar of earnings, which is well above the average P/E ratio since 1950 of 17.85. If the S&P were to decline to its 1950-2017average P/E, S&P stock prices would plummet by 27.2%.
However for long-term investors, it is almost a certainty that the S&P would rebound to its old high. But how long will it take? Should the S&P P/E ratio drop to its 1950-2017 average, retired baby boomers who will be age 70.5 and older in 2018, and other retirees in need of funds for living, would be required to withdraw funds from their non-Roth retirement accounts at these low stock prices. The question then becomes, how long will it take for the S&P to return to its 2017 record high level?
In August 2000 with the S&P at 1517.7, the stock index plummeted 31.4% over the next 13 months. It then took the S&P 81 months to climb back to its August 2000 level. And six months later in November 2007, the S&P once again began falling ultimately slumping to 735.1 by February 2009. Thus, between August 2000 and February 2009, or 102 months, the S&P fell by 51.6%. During this bear or down market, individuals that made mandatory or voluntary withdrawals from their retirement accounts dominated by stocks likely suffered significant financial hits.
With U.S. stock prices at current record highs, recent empirical evidence indicates those required to make significant withdrawals from their retirement accounts over a short-time horizon should evaluate re-balancing their investment portfolio to be less dependent on stock prices. As investment guru Ben Graham advised, "Diversify, Diversify!"