The Practical Economist

You Asked

 

 Q:  I think that, in my heart, I agree with you, that the Stock Market is overvalued at this point.  And, in concept, I understand what you mean when you talk about how to restructure my portfolio.  But I'm not sure how to do it.  How much out of the Market should I be?  And how do I decide what I should stay invested in?


A:  First off, there's a limit to how perfectly we can advise you in this context  Every individual investor's profile is different.  Really. Some of the variables are age, current and expected future income, stability of that income, other wealth you may have, your lifestyle, your investment sophistication...these are just some.  However, assuming you are neither looking to be a professional trader nor dependent on your investment portfolio to eat for the week, we'll try to sound out what we've been saying.

We think that you probably understand that our intention is to make you understand that the risk of trading is now very high.  Some folks out there are going to misinterpret our perspective as one that's calling for a bearish markets...if you're really reading, you understand that's not what we're saying. 

So, the question is what stocks we think fall into that category of "high risk."  In a nutshell, it would be any company for which the primary reason you're investing in it is a profit you expect to make in the short- to-medium term based on specific projects or events that are expected to occur in that timeframe.  And that covers a lot of ground, including some names that are well known and widely traded.

Let's be clear: we are not project a Black Swan event or any kind of market crash.  What we're saying is two things:  (1) stocks are now not returning enough reward for risk, thus the expected return, in our view, is negative and (2) the short- to-medium term outlook for corporate earnings is meager.  Our view: all of this will catch up with investors in the next month or two.  Why are investors in denial?  It's that pesky low level of interest rates that has everyone reaching for yield.

What do you want to be invested in?  In the simplest language we can use, you want to be invested in companies that you are 99% certain will be thriving companies 25 years from now.  To put it slightly more specifically, you should be thinking in terms of companies that have some kind of strong competitive advantage and will likely be favored by consumers and/or government entities...this is if you are looking at specific names.  We also favor investing in appropriate index funds.  We are not going to recommend any particular fund name or investing style...but you should be thinking somewhat broadly in terms of diversification and long in timeframe.