Where to Invest in an Overvalued Market?
The market crashed almost ten years ago and has been rising ever since.
This is awesome if you’ve participated in the climb.
But, there’s a problem, with assets climbing for 10 years, it’s tough to find decent and well valued investments.
Enjoy a few of my recent articles on InvestorPlace and U.S. News and World Report about finding gems in an overvalued market as well as tips about how to value the markets.
Get investment ideas in my recent article from InvestorPlace.
5 Places to Invest in a Frothy Market
These 5 investment ideas will round out your portfolio until bargains re-emerge
Seeking investments that are fairly valued today is like looking for a needle in a haystack. After a 10-year bull market, there are slim pickings in this frothy market. It reminds me of 1998, when I was looking for value stocks during the dot com boom. Everything was richly valued.
Fortunately, I didn’t go all in then, so was only modestly damaged by the horrendous S&P 500 losses of 9.03%, 11.85% and 21.97% during the bust years of 2000 through 2002.
Now, I’m not saying that we’re due for three losing years, but the future is unknowable. And, markets have periodic down years. Yet, running for the hills, going into all cash isn’t the solution either. After all, as economist John Maynard Keynes brilliantly said, “The market can stay irrational longer than you can stay solvent.”
How Overvalued Is the Market?
The U.S. stock market is more richly valued than it has been since the turn of the century. The current Shiller PE ratio is 32.54 and the mean ratio is 16.85. The Shiller PE is a price earnings ratio that divides the current price of a stock or index by the inflation-adjusted earnings from the previous 10 years. It’s a popular way to compare the valuation of stocks and indexes today with historical averages. Even with a dirth of underpriced stocks, you can still find some places to invest.
So, here’s where to invest in a frothy market.
1. Cash Investing
After years of near-zero interest rates, cash isn’t such a bad place to be anymore. If you’re skittish about the U.S. stock market valuation today, you can get paid to wait for fairer valuations by investing in cash.
Granted this is a capital preservation strategy, not a growth approach. Yet, sometimes cash preservation is a wise tactic, especially in a richly valued investment market.
So, the easiest cash investments are money market funds and CDs. Eschewed by investors, CDs aren’t so silly during a rising-interest-rate environment, with richly valued equities. Currently, you can get a six-month Ally CD paying 2%, a one-year Capital One CD with a 2.3% yield and Sallie Mae pays 2.8% for a two-year CD.
2. Bond Investing
You can buy individual bonds of varying quality and maturities to increase your fixed yield. For example, Prudential Financial offers an A-rated bond maturing in 14 months, selling at a discount, with a 2.834% yield to maturity. Go out a bit further on the yield curve and you can garner a three-year A-rated corporate bond with a yield to maturity of 3.88%.
For Contrarian investors, here’s another investment strategy that might pay off. This is another InvesestorPlace article with unique investing ideas.
Why the “Puppies of the Dow” Will Beat the Market
This strategy using Dow Jones stocks can be very effective
There are countless investment strategies ranging from complex options tactics to simply buying an S&P 500 index fund. For investors seeking a “conservative-ish”, high dividend investment approach that’s likely to beat the S&P 500, the Dow Jones Industrial Average and is easy to implement, consider the “Dogs of the Dow” — small dog or puppies approach.
The Dogs of the Dow are the ten highest yielding Dow Jones stocks. Proponents of this approach recommend buying these 10 stocks at the beginning of each year and selling them at the end, then repeat the process. This investment strategy has beat both the Dow and the S&P 500 most years since 2000.
Between 2000 and 2016, the Dogs of the Dow returned 8.6% annually, while the S&P 500 garnered 6.2%. But if you tweak the approach, you’re likely to improve your returns even more.
What Are the Puppies of the Dow?
The Puppies of the Dow are a subset of five of the 10 Dogs of the Dow with the lowest prices. Historically, this group has performed better than a strict Dogs of the Dow investment strategy.
Become a Millionaire with this Best Personal Investment Strategy
From 2000 through 2016, the Small Dogs of the Dow, earned a 10.45% annualized return. That’s more than 4% greater than the S&P 500’s annualized gain of 6.2% and approximately 2% above the 8.6% return of the standard Dogs of the Dow approach during that same period.
As is the case with all investment approaches, the returns don’t follow this pattern every single year. Between 2012 and 2016, both the Dogs and the Puppies of the Dow beat the S&P 500 each year. Yet, in 2016 the Dogs of the Dow beat the Small Dogs of the Dow. And last year, the S&P 500 returned 21.64%, while the Dogs of the Dow earned just 19%.
If you’re interested in learning about how to value the market yourself, check out what I wrote about this topic at U.S. News and World Report.
What 8 Valuation Metrics Tell Us About the Market Now
All but one of these market gauges are broadcasting the same message.
How do you gauge the true worth of a market like the S&P 500? Like individual stocks, the price paid for the market as a whole may be higher or lower than its actual value, and market valuation matters.
To maximize investment gains, you don’t want to overpay for stocks, whether it’s an individual company or an entire market index. A significantly overvalued stock market might even prompt you to take action, perhaps by selling some stocks and shifting more of your assets into cash or bonds.
But there are many ways to value the stock market, and we describe eight of them here, including how they currently compare with historical markets. All but one of these market metrics are broadcasting the same message now: The market is overvalued.
Curious about new stock market initial public offerings? Read; Should I Invest in an IPO?
Is that a reason to sell? Not necessarily, says Ben Carlson, director of institutional asset management at Ritholtz Wealth Management in New York. We’ve seen bear markets approximately every five years during the past 70-plus years, and valuations were elevated in many but not all the preceding periods, he says. Because predicting the exact peaks and valleys of a market is impossible, market valuations are merely a guide to future returns, not a crystal ball.
As with all investing, don’t look at the stock and bond markets in the same way as holding your money in a bank money market account or certificate of deposit. Investing in financial markets is a wonderful long term way to build wealth, but you must have patience and understand what you’re investing in. And don’t be afraid to hold some cash. Markets fall, and when prices decline, it’s great to have some cash to deploy.
[button link=”http://amzn.to/2lrB3y8″ type=”big” newwindow=”yes”] For time tested investing strategies, enjoy Invest and Beat the Pros – Create and Manage a Successful Investment Portfolio[/button]