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Ben Carlson: How To Invest In An Overvalued Market

TedTed
in Fund Discussions
FYI: Investors have been warned about overvalued markets basically since the start of this stock market recovery. Some people are scared of above average valuations. Others simply choose to ignore them. And still others use them as scare tactics to sell financial product or newsletters. While you can’t control what the current market valuations are you can control what you will do about them. Here’s a piece I wrote for Bloomberg on your options as an investor in an overvalued market.
Regards,
Ted
http://awealthofcommonsense.com/2017/06/how-to-invest-in-an-overvalued-market/

Comments

  • Flack
    “There are no easy solutions when investing in an overvalued market. Every strategy has its flaws. The trick for investors in this situation is to find a strategy they can stick with no matter what happens in the markets. No one can predict the future, but you can plan how you will react under different scenarios.”
    My emphasis.

    Roughly 10,000 people retire each day – or roughly 3,650,000 each year.
    My guess is that >90% of them are unaware of the market’s Sequence of Returns.

    Situation Assumption -
    Assume that it’s June and that your friend (age 65) is about to retire at the end of the year with a portfolio of $600,000. (The actual amount is anything he believes is sufficient to be adequate for his retirement.) His mortgage is paid and he has $3,000 in credit card debt.
    He has a 60/40 or 50/50 allocation of vanilla mutual funds in a 401k and $10,000 in cash. He has booked a cruise in January for his family and plans to buy a new car that he will keep for the next ten years.

    The market starts to fall dramatically. By November it’s down 25% and sliding.
    He asks your advice.

    Based upon “find a strategy they can stick with no matter what happens in the market”, what do you tell him?



  • Old_JoeOld_Joe
    edited June 2017
    Well, for sure forget the cruise for now and use the money to pay the credit card debt, and maybe take another look at keeping the present vehicle another year or so.

    The paid mortgage is great, but I'd need more info for any recommendations.

    • How large is this "family", and what special needs may they have?
    • What about sources of income- SS for example?
    • What is their expense profile? Can any expenses be reduced?
  • Tony
    edited June 2017
    Tell him to use the strategy described here:
    http://www.mutualfundobserver.com/2013/06/timing-method-performance-over-ten-decades/

    "Employing the 10-month simple moving average timing method (10-mo SMA) to these data over ten decades reveals impressive performance, reiterating the conclusion documented by Faber and delighting AKAFlack, an MFO reader who champions the strategy."
  • davidrmorandavidrmoran
    Once they start handwaving ("would make sense") mathematically like this, I give up and read elsewhere:

    ... Trees don’t grow to the sky, so it would make sense that a period of above-average returns would be followed by a period of below-average returns.
  • LLJB
    I can't figure out why the 10 month SMA system doesn't get more press for retirees. You will get whipsawed occasionally but you're never going to suffer an enormous setback. When there is a big crisis you're going to come out ahead. If you compare it to a standard 60/40 buy and hold it's been a lot better on real returns and basically the same on a risk adjusted basis over the last 30 years. If you compare it to famed funds like Wellington and Wellesley it still wins the absolute return game, although just a little over Wellington (a lot over Wellesley) and it loses the risk adjusted game, but it depends on what you care about. The max drawdown is better than Wellington if that matters but you give up a lot in return if you choose Wellesley for the lower max drawdown.

    I guess there's are tax implications if someone isn't using a tax protected account and maybe that's a drawback compared to some other strategies but this seems like a great game to me and one that should work pretty well for a lot of people.
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