A net 84% of fund managers surveyed by the Bank of America and Merrill Lynch say the U.S. is currently the most overvalued market. Despite reaching new highs weekly, data indicates that our overvalued market is not yet at the extreme levels, such as the levels seen during the 1999 internet bubble.
Markets don’t simply drop because of high values. Instead, it takes an unforeseen event to trigger a drop. However, a pullback in value is always a possibility, so you should be both emotionally and financially prepared for such a situation, especially in an overvalued market when stakes are high.
Everyone has different investment strategies they swear by. Here are just a couple ideas for someone who is concerned about the state of the current market.
Diversify Your Portfolio
Part of a diversified portfolio is thinking internationally. Even when one country’s market is overvalued, there may be promising opportunities in other countries and continents. Below, you will find what investments might pay off in today’s market.
Another option is dollar cost averaging into a diversified portfolio set. Periodically investing at predetermined intervals is the simplest way to avoid major mistakes and over-thinking.
Pocket Some Earnings for Peace of Mind
While day-trading and market-timing are proven to be ineffective strategies, there is no harm in trimming your portfolio if it will keep you in the investment game. Moving a portfolio entirely to cash is not a recommended strategy, but when stakes are high, moving approximately 25% of an overvalued market sector to a safer location will not impact your investments’ long-term performance. A small shift in your portfolio can provide you with temporary peace of mind, but be sure you have a plan for redeploying your funds.
There are many different ways to forecast when an overvalued market is reaching its tipping point, which is when you would want to pocket some earnings if that makes you more comfortable than staying in the market. One factor to look at is the price-to-earnings ratio of the Standard and Poor’s 500 indexes. Another is the yield curve. When the curve flattens that could indicate a recession in the near future.
Be a Long-Term Investor
You may identify that some segments of your portfolio are potentially overvalued. Instead of panicking, look at your long-term investment plan. You may be better off to ignore the overvalued market and do nothing. In fact, if you have a longer window to invest, an overvalued market could give you the opportunity to buy stocks on sale during a price drop.
Potential Strategies for Today’s World
With the U.S. market at such a high value and the European market not far behind, Asia is looking to be the most promising market, according to this blog from September 2017. Japan is especially attractive, but everyone has a limit they’re comfortable with investing in Asia, as with any market.
If you want to invest in the states, healthcare, technology, and telecommunications may be three sectors you should look to invest in.
Regardless of your investment strategy, you want to make decisions that help you sleep easier at night. One possible tool is GMO where you can register for free to have easy access to insights that can help you plan your next move. The World Bank also has a plethora of open data. No one truly knows exactly when and how the market will turn next, but research is the best way to stay at the top of your game.