How should I invest in Today's Market?

What should I do in today's market that is at such a high valuation ?? Should I sell my positions, reduce my positions or should I invest more as the market seem to go up and up ??

There is no one answer to all those questions. A lot depends upon your appetite for risk and your horizon for investment returns.  I will try to address different scenarios below and give my recommendations for each one.

  • Invested in stock market thru your 401K or IRA in mutual or index funds.
    • Keep investing in the market if there is no need to sell and cash out in the next 2 years. Dollar cost averaging of regular contributions will cover you during downturns and will yield a more compounding return in the long term.
  • Invested in individual stocks be it personal or retirement accounts
    • Look at the stock valuation metrics to see if it's over valued compared to the overall market and also compared to the particular sector it's in. The CAPE P/E ratio of each particular sector is more relevant in comparing the valuation metrics. For example, technology sector P/E ratios are usually higher than say consumer discretionary. 
  • Invested in Growth stocks 
    • Growth stocks are usually the ones that don't pay any dividends and have higher projected growth rate for the next 5 to 10 years compared to average S&P 500. Since 1970 till now, S&P 500 has grown at an average annual yield of 6.5%. I personally consider a stock to be a growth stock if it's annual EPS growth rate is higher than 10%. Stocks like FB, NOW, GOOG are growth stocks. Market typically values a stock at P/E ratio of 15 if the EPS is projected to grow at the annual rate of 3%. Never pay more than (2 x annual growth rate + 8.5) for any stock no matter how hot the stock is. Otherwise, it will lead to bubbles similar to dotcom bubbles experienced in 2000. It's better to take some profits off the table now given the run up in all the growth stocks. I am not recommending to sell all. In my opinion, you should always be invested in the stock market no matter what as long as you pay a fair price
  • Invested in Dividend Stocks
    • There are a lot of quality companies that pay a decent dividend for investors. I consider a dividend to be a decent one if the annual yield is greater than 2%. If you have bought the stock below the intrinsic value and it pays a decent dividend, there is no reason to sell it now. 
  • Not invested at the moment. 
    • If you are not invested in the market at the moment, its not a good idea to enter at this time. Wait for S&P to pull back to sub 2000 level. We are talking about a 20% drop in S&P to get to that level. You can start to take some positions when it drops 10% and invest more when it drops another 10%. 

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