If you're like most investors, you're uneasy about the recent declines in stock market prices. Even the most experienced investors get a bit anxious when markets decline. But, if you're smart, you aren't panicking and you aren't selling. 

The reason that you invest and on average receive higher returns than cash in the bank, is because you can accept the ride. The market compensates you with higher returns for the risk you’re taking. But that doesn't mean that you'll earn positive investment returns every year.

As of last Friday, various stock market indices have year to date losses. But over the past 52 weeks, all but the Nasdaq, were in positive territory.

Shiller CAPE Price Earnings Ratio - S&P 500

Data source: https://www.multpl.com/shiller-pe  | February 15, 2022

What to do about cyclical investment markets?

I’ve been pouring over the financial media, searching for wisdom to share with you. From the Wall Street Journal to Marketwatch and Barrons, you’ll find lots of people giving advice. But the one thing that’s missing is a sure fire prediction for the future.

No one can guarantee future investment market returns!

Jason Zweig, one of my favorite Wall Street Journal columnists, discussed how overvalued stocks are now, according to historical averages. Using the Shiller CAPE (cyclically adjusted price earnings) Ratio, the S&P 500 CAPE ratio is 36.49. This compares with the average CAPE ratio of 16.9. The ratio is calculated by dividing a company or index’s current price by the average of the company’s earnings for the last ten years, adjusted for inflation.

Investors are paying a much higher price or the average stock than historically.

Here’s a link to an explainer I wrote about the Price Earnings ratio.

Current Shiller PE Ratio: 36.49

What should you do with your investments now?

Since the stock market is overvalued today, does that mean prices will fall and that the PE ratio will return to its historical average? Or maybe, companies are becoming so efficient and productive that their earnings will spike and bring down the PE ratio to more reasonable levels.

We can look at the past and claim that the markets are due for a serious correction, and that might be true. But that still begs the question regarding when, how much, and for how long the stock market will stay down, should a crash occur.

Since we don’t know the future, you must know yourself, and how much of a market decline you can tolerate as well as how long you expect to be invested, before needing to withdraw your money.

If you’re a retiree, living off of your investments, you’ll want a conservative asset allocation with greater percentages in bonds and cash. While age 20-40 year olds with good jobs have time to allow their more stock-heavy portfolios to recover from a bear market.

Now is a good time to rebalance your investments. You might find that you need to add to your stock investments if their values have fallen below their target. 

I’ve written more here: How To Benefit From Cyclical Investment Markets

If you want the simplest way to handle your investments, consider investing with a robo-advisor. These automated investment advisors do the heavy lifting for you by getting to know you, and then crafting an investment portfolio in line with your time horizon and risk tolerance. 

Learn more here: Best Robo-Advisors Guide

And for DIY-ers, make sure to invest in accord with your risk tolerance. Don’t put money in the market you’ll need within the next five years. And keep risky assets like crypto and individual stocks to 5% or so of your portfolio. 

YouTube Channel Updates

I’m proud to say that my YouTube Channel is growing nicely! I do a lot of robo-advisor reviews, some interviews with important investing folks, and offer answers to frequently asked financial questions. 

Check it out, and if it looks worthwhile, subscribe: Barbara Friedberg YouTube Channel