Here’s a great article at the WSJ by Burton Malkiel, author of A Random Walk Down Wall Street and Chief Investment Officer of Wealthfront. Malkiel provides two strategies that might be worth considering in an overpriced world saying:
“What, then, can an investor do to control risk? The two strategies that work are broad diversification and rebalancing.”
Here’s an excerpt from that article:
What should an investor do when all asset classes appear overpriced? The 10-year U.S. Treasury bond currently yields about 2.6%, much lower than the 5% historical average and only slightly higher than the Federal Reserve’s 2% inflation target. Yields of lower-quality bonds are unusually meager compared with those of traditionally safe Treasurys.
For equities, the cycle-adjusted price/earnings ratio, or CAPE—the valuation metric that does the best job in predicting future 10-year rates of return—is about 34. That’s one of the highest valuations ever, exceeded only by the readings in 1929 and early 2000, prior to crashes. Today’s CAPE suggests that the 10-year equity rate of return will be barely positive.
Investors have reason to worry, but they need to be aware of two basic facts. First, no valuation metric can dependably forecast the future. CAPEs were unusually high in the mid-1990s, and Alan Greenspan gave his famous “irrational exuberance” speech in late 1996. An investor who bought equities then and held on would have enjoyed a generous 8.5% annual return despite the punishing bear market of the early 2000s. CAPEs were close to 30 at the start of 2017, prompting many market gurus to say stocks were overvalued. The S&P 500 index returned 19% in 2017.
You can read the full article at the WSJ here.
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