Worried about whether or not the market is overvalued? Did the markets set ANOTHER record?
You aren’t alone.
Seemingly every day, a major financial website or magazine publishes an article about how the stock market is overvalued, how this is a top, and that you should feel very, very scared.
But, should you even bother worrying about a market top?
Not if you aren’t talking about short-term investments. If you are talking about a 401k , an IRA, or any other form of long-term investing, you should ignore all the market top talk.
What To Do For a Market Top
The biggest problem with a market top is knowing WHEN it is going to happen. Remember, the stock market does not move based upon absolute truth. Rather, the stock market is a popularity contest where people vote for companies, or their shares, by buying them, and vote against companies, or their shares, by selling them. It is driven entirely by people (and computer programs made to anticipate people’s reactions, but that is another article).
What that means, is even if the market really is truly overvalued, right now, today, it still does not mean that the sell off will begin today. Or tomorrow. Or next month. Or even next year.
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The market is overvalued, when the market says it is overvalued. And, the market is a fickle thing.
The worst part, is that even if you are right, you are still losing money with every point higher the markets climb. Investing is about making money, not being right. If you sold 12 month, 18 months, heck 24 months ago, when the alarming market overvaluation articles started coming out, you left a lot of money on the table.
What a Top Actually Looks Like
The last market top was October 9, 2007. From there the market lost an extraordinary amount of value.
The market bottom (for the Dow) was on March 6, 2009. From there, the markets moved up.
Here is where things get interesting.
For the sake of simplicity, let’s say we were talking about your 401k. It is possible that it lost half of its value between 2007 and 2009. Scary, right?
But, if you take the long view, what was the real damage?
By 2013, less than 10 years later, the markets were fully recovered and marching higher. The only way you lost money was if you foolishly sold and locked in your losses. Even better, if you kept contributing to your 401k, or IRA, the whole time, everyone of those contributions since 2009 (for the last four years) is UP, and up big.
In other words, not only have you recovered your whole investment, you made more money, a lot more money.
The way to do it again? Do the same thing.
Make sure your portfolio is properly invested. Market corrections aren’t usually spread evenly across the board. Maybe international falls fast and hard, maybe it’s a cushion. With diversification, it doesn’t matter what will happen, you’ll be ready.
Yes, when the market does top, and the markets do fall (and they will), the balance on your statement will go down.
Do NOT panic.
At the end of the year, rebalance your portfolio. That act buys low and sells high automatically.
Every drop in the market is an opportunity to buy at a lower price.
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Unless you really know what you are doing, and have over $100,000 in your investing account, do not buy individual stocks. The diversification of index funds, mutual funds, or ETFs will ensure that a single tricky company won’t harm your investments.
The articles will only get louder the higher the market goes, and the panic will only grow when it starts to fall. Don’t follow the sheep off the cliff. Keep buying, and in five or ten years when you start reading the next wave of overvaluation articles you can smile and check out your “overvalued” portfolio, once again.