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By in Advanced Investing, Asset Allocation, Bond, Economics, Investing, Money Management, Mutual Funds | 15 comments

Are the Investment Markets Overvalued?

Should I Sell My Investments?

Should I Invest in Dividend Stocks Now?


Protect your funds from inflation

Don’t panic! Investment values fluctuate!

Asset bubbles are a long term economic reality, dating back to the tulip bulb mania centuries ago. At the end of last century, the new normal was “technology stocks cannot fail.” Then there was the real estate mania in the middle of last decade. You were considered un-American if you didn’t buy a home. After all, low interest rates along with easy access to cash made buying a home as easy as buying a car.

Today, as stock prices hit record highs and real estate is trending upward, my in box is filled with questions. It seems as though when markets peak or tank, investors worry. Is there something I should be doing differently.

Readers muse, maybe I should concentrate on high dividend stocks, since yields are so low on my savings account.

Others worry that they missed the stock market advance and now wonder if they should dive in with both feet.

Expert Advice-What Not to do With Your Investments Now

Don’t panic!

Investment professors (myself included), John Bogle (founder of the Vanguard Fund Group), and Burton Malkiel (author of A random Walk Down Wall Street) advise investors to keep their funds in an asset allocation in line with their risk tolerance and stay the course. Over time, if you believe the USA and global community will continue to prosper, then stay invested. and accept that the investment markets are volatile and over time, have trended upward.

Do you hear a theme? Of course you should have an asset allocation set up and continue regular investing through thick and thin, with regular rebalancing.

Advice for New Investors

But what if you don’t, is it too late to get in the market?

For those of you who didn’t start investing at the trough of the last market, do not put all of your investable funds into the stock market now. I’m not suggesting the stock market is ready for a fall, but only that after an extreme advance in stock prices, at some point there will be a correction or reversal.

For newer investors, set up your dollar cost averaging investment plan now. Choose an index fund or two invested in the USA and International markets and contribute a set amount regularly. Contact your banks to make the transfer automatically. That way, you will buy more shares when prices are low and fewer when prices are higher thereby reducing the total average cost of your investment.

Advice for More Experienced Investors

Ask yourself how you will feel if your total portfolio drops 20 to 30 percent. It is likely that at some point (and no one can tell you when), your investment values will decline. If you are approaching retirement or feeling that nervous feeling in your stomach. Sell some of your stock investments. You may miss additional upside in your investment portfolio, but you will also limit the losses when the market begins to reverse course.

Check your asset allocation. If it is more than 3-5% off your initial percentages, rebalance now. The rebalancing will preserve some of your stock gains and reduce potential declines when the market goes down.

What About Bonds?

With respect to bond investing. Avoid long term bond funds at present, keeping your bond duration less than 3 years. When interest rates start to edge upward, long term bond funds will be hit with declines in value more than shorter term funds.

Mental Money

If you want the opportunity for returns on your cash larger than that of a bank CD, you need to be prepared for fluctuations in value. Because of the opportunity for greater returns, you need to be prepared for greater investment value volatility.

Every investment has risk and the job of the investor is to understand that risk and invest accordingly. If you are more than 10 years from retirement, can tolerate some volatility and believe that the  US and international economies will grow, then stay the course and don’t be surprised  when your investment values fluctuate.

I don’t believe investment markets are significantly overvalued now (and I certainly do not think the markets are undervalued), but only hindsight will tell for certain.

Are you making portfolio  changes now? What are your predictions for the markets in the future?

This article appeared in the following carnivals:
Carnival of Retirement at Making Sense of Cents
Finance Carnival for Young Adults at 20s Finances
Carnival of MoneyPros at Family Money Values
Carnival of Financial Camaraderie at My Personal Finance Journ
Yakezie Carnival at Young And Thrifty

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  1. I have no predictions! I just keep dollar cost averaging into the market. I have an asset allocation that tempers the volatility of the market. Besides I am thinking very long (25-30 years) term. I am in a somewhat unique situation where I am not dependent on income from investments to live in retirement. It makes it much easier to tolerate the fluctuations.


    March 14, 2013

  2. No predictions here either. 🙂 I am not really making any changes in our portfolio as I like to take the long term view of our investments. Fluctuations happen and I am ok with that as it’s to be expected. If any changes are going on, it’s just to make sure there is no rebalancing to be done…but that’s something I look at on a quarterly/semi-annual basis anyway.

    John S @ Frugal Rules

    March 15, 2013

  3. (1) I agree with John S. Rebalancing is part of the asset allocation and should be done in regular, pre-set intervalls.
    (2) We tend to forget that modern life entails (often hidden) financial risk whether one is invested in any risky assets or not. As a matter of fact, history shows that investing in risky assets has countered one such hidden risk, purchasing power risk. Thus, investing in risky assets actually lowers overall financial risk.
    (3) I recently read a study which showed that investors who jumped on the bandwagon after large moves underperformed the steady investor who stuck to her portfolio allocation by 7% per year!


    March 15, 2013

  4. @Krantcents-Dollar cost averaging is the best approach in my opinion. And a wonderful accomplishment not to be dependent upon investment income in retirement.
    @John and CT-I’m not at all surprised by the study. The psychology of following the herd is quite a problem for many. That is why the empirically supported dollar cost averaging is the sensible approach to long term wealth building.


    March 19, 2013

  5. We actually think there’s a good chance the stock market will run further. While we’re raising stop losses (the WE is OG and I), we’re doing nothing different other than rebalancing.


    March 20, 2013

  6. Joe, It’s so difficult to predict the top. (the middle and bottom). Setting stop loss is one way to try and cut your losses. Keep us posted as to how it works.


    March 20, 2013

  7. The market is difficult to predict at the moment, but I think it is really peaking, but people should still be careful about investing their money.

    The College Investor

    March 21, 2013

  8. @The college investor, Definitely don’t want to pile into the stock market while it’s nearing a peak!!

    Barbara Friedberg

    March 21, 2013

  9. It’s so hard to determine what the stock market will do since the economy is still so delicate. However, I think each person has to determine their risk tolerance; if they can stomach the ups and downs of the market and invest for the long haul, then investing now might be fine for them. As for myself, I’m risk-averse. I like mutual funds.

    Little House

    March 22, 2013

  10. @Little HOuse, One’s risk tolerance is such an important concept. How will you react to the normal volatility in asset prices? If you are more risk averse, better off with less percent in stock investments and more in bond and cash investments.


    March 22, 2013

  11. There’s too many uncertainties in the market right now and I would have to say take small baby steps until there is a clear direction of which way the economy is going. I don’t think we are hitting the peak yet, and investment markets are are not really overvalued now. For me, I’m just playing the waiting game. i’m not making any moves really.

    Pat Drummond

    March 22, 2013

  12. Nice post and good advice. John Hancock has been running a series of commercials showing upscale couples talking to an advisor with the them “… its time to invest…” My question is what the heck where these people thinking over the past 4-5 years. Sadly many of them will get in now and get creamed in the next market downturn.

  13. @Pat-Picking the direction of the markets is a fools errand. No way to know for certain, except in hindsight.
    @roger-Well put. So many investors wait to jump into the markets until the largest upswing is over. Best to stay invested and avoid timing the market…. as you certainly know 🙂


    March 24, 2013

  14. If you step back and look at the earnings of the companies that make up the stock market, I believe this time round the market is not as overvalued as the last time when it passed through this level.

    Therefore, I believe we’ve not reached “bubble territory” yet. Your comments regarding bubbles are certainly right on. But I don’t think we’re there just quite yet.

    Looking away from the stock market to the economic cycle, we see almost every cycle last 7-10 years, bottom to bottom. Given that the last bottom was in 2009, I believe we still have a few more years before “the next one” (recession) hits. For a chart showing the cycles for the past 70 years or so, check this out:

    William @ Bite the Bullet

    March 25, 2013

  15. @William, Good points. Actually, it’s quite difficult to pinpoint the next bubble. Even if we are not near a market peak, we are certainly a lot closer than we were during the past few years. I advise, “don’t try to time the markets.”
    (The Shiller PE, one measure of market valuation has the markets approaching a peak.)


    March 26, 2013


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