It seems like every week I find myself looking at an article where some stock market ‘legend’ says the market is in a bubble that’s about to burst. I personally hate these articles, and feel that trying to time the market is a fool’s errand. It’s very easy to look back and see the huge dip that happened about a year ago and then say ‘I should have bought there’. Hindsight is always 20/20, and unless you can predict the future you shouldn’t try to time the market. Here’s what I’m doing instead:
- Don’t sell everything and try to time the market.
- Keep some cash available in case we do see a pull back.
- Limit or avoid holding stocks that are extremely overvalued.
- Make sure you invest in a variety of stocks instead of just buying high growth stocks.
Just about a year ago we saw the S&P drop significantly. It’s easy to look back and wish you would have bought a bunch of stocks right around the end of March. Here’s the thing. It could have kept dropping, and it was a lot scarier to look at this chart when the right side of it was missing. Some people sold all their stocks and ended up taking a significant loss and then avoided the huge gains that happened between April and June. Rather than trying to time the market, a better approach (for most people) would have been to hold and buy more while prices were low.
Right now I’m investing in stocks, but I’ve also got 20% of my automatic deductions going into cash. Volatility is high and I think there’s a chance that we could see another significant pullback. Notice I said ‘I think’, and not ‘I know’. Nobody knows, and I would avoid trusting people that say they do. Rather than trying to time the market I’m going to keep investing, but I’m also going to keep some cash on the side so that I’ll be able to use it if we do see another pullback.
Another thing I’m doing is trying to limit my exposure to growth stocks that are extremely overvalued. One of the things I like the most about morningstar’s premium service is they give stocks a rating of 1-5 stars. 1 star ratings are assigned to stocks that they believe are overvalued, and 5 star ratings are for undervalued stocks. I’m avoiding stocks that are above the 1 star level for the most part. That said, there are still several stocks that are currently undervalued (according to morningstar) even though the market is at an all time high. In my case I currently have a balanced portfolio of stocks in my Roth IRA account, which includes some growth stocks but also includes stock in some older, more established companies.
Morningstar also shares some of their fair value estimates for everyone, so even if you aren’t subscribed to their premium service you can see that Amazon (AMZN) currently has a FVE of $4,000, which implies that morningstar believes Amazon is actually undervalued right now, even though it’s a growth stock and the price is currently over $3,000. On the other hand, a lot of the stocks that have been extremely popular this year (I’m not going to name any names) currently sit above the 1 star price. While I personally like some of these companies, and would like to invest in them at some point, I’ve decided to limit my exposure to them for the time being.
So that brings us to the end of the first (and hopefully the last) post on this site about the market being in a bubble. Please keep in mind I’m not a financial advisor, and you should do your own research before investing in anything. Having said that I personally think some stocks are currently overvalued, however there’s no telling when we will see another pullback, and there are still some stocks that are trading at a fair value (or better) out there.