S&P 500 Tumbles … What’s Next?
Ready for the next market correction? Today’s drop rekindles questions of whether this bull market is finally over. To be sure, stocks are up over 7% in the first 4 months, extending the 8-year run from the 2009 low.
But the bull market run has resulted in some expensive prices. Regardless of whether one uses multiples relative to sales, book value, trailing earnings, or normalized earnings, stocks aren’t cheap. The Shiller P/E ratio, which compares stock prices to normalized earnings over a 10-year cycle, is at its third highest dating back to 1887. The top two instances were 1929 (before the Great Depression) and 1997 (during the Tech Bubble).
But before you sell all your stocks with the thought of protecting your recent gains, consider the fact that valuation alone is a poor indicator for timing the markets. For example, after stocks entered “overvalued” territory in 1997, they ran another 80% for 3 years before correcting.
So, what’s an investor to do? The good news is that you have more control than you think. First, check your asset allocation. Are you still in line with your target, or have recent stock market gains pushed your exposure beyond what you’re seeking? If so, rebalance, and you’ll prune some of those gains while adding to areas that have not run up. It’s “buy low, sell high” at its best.
Second, do you have your cash reserves ready? Beyond your portfolio, everyone should have a cash reserve that’s appropriate for their situation. Younger folks in their working years can have less, while retirees living off their portfolios should have more. Other nuances play their part as well, but having a cash reserve not only manages through tough times but provides dry powder when assets are on the cheap.
Third, and perhaps the most important challenge: your own psyche. The evidence showing the negative impact that investors’ emotional urges has on investment performance is downright ugly. We’re all human, and when it comes to investing most individuals need help. The value that a trusted relationship with a seasoned advisor provides is powerful. Such a partner will talk you off the cliff during market troughs and serve as the voice of reason when the next bubble mania ensues.
Altogether, the average investor has more control over their portfolio returns than they realize. But most don’t know it. Instead, they often worry about things that matter less while underutilizing some more productive ways to better their investment experience.
Don’t be an average investor. Be disciplined about rebalancing. Have proper cash on hand. And improve your returns with a disciplined system of checks and balances that, frankly, saves you from yourself.