Are the Investment Markets Overvalued?
Should I Sell My Investments?
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.
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.
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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