No, stocks aren't cheap, but don't act rashly

What long-term investors should do amid hazards that might make the stock market crash.

  • By Jason Zweig,
  • The Wall Street Journal
  • Investing Strategies
  • Investing in Stocks
  • Market Analysis
  • Market Volatility
  • Stocks
  • Investing Strategies
  • Investing in Stocks
  • Market Analysis
  • Market Volatility
  • Stocks
  • Investing Strategies
  • Investing in Stocks
  • Market Analysis
  • Market Volatility
  • Stocks
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If you're like many investors, you might be thinking it's time to take some risk off the table.

On Wednesday, barring a crash, this bull market will become the longest in the history of the S&P 500 (.SPX), according to S&P Dow Jones Indices. Stocks have been rising steadily, without the 20% decline that conventionally defines a bear market, since March 2009 — making this bull run about to exceed the nearly-10-year stretch that ended in March 2000.

After returning more than 400%, including dividends, since this bull market began, U.S. stocks aren't cheap. They're selling at about 32.8 times their long-term average earnings, adjusted for inflation, according to data from economist Robert Shiller at Yale University — nearly twice their typical level since 1881.

Meanwhile, analysts expect interest rates to rise, some giant technology companies are faltering, trade wars seem to be spreading and emerging-market economies are sputtering. Should you protect your assets from a potential collapse?

First, it's worth bearing in mind that there's always something for investors to worry about.

Yes, 2018 is full of uncertainty and teeming with hazards that might make the stock market crash. So was 2017. So were 2016, 2015, 2014 — and every year since stockbrokers first gathered in New York in the early 1790s.

That's why now, like most of the time, the right thing for long-term investors to do is...nothing.

If you're convinced that Armageddon is around the corner, however, you probably should take your fear as a signal that it's time to re-evaluate your investing plan. After all, if the market does crash and you did nothing to act on your worries, you will kick yourself and may well bail out of the market completely.

One of the keys to successful investing over the long run, the Nobel Prize-winning psychologist Daniel Kahneman has often said, is minimizing your future regret. The bigger, more frequent and more sudden the steps you take, the more opportunities you create to look back later and regard them as mistakes.

So, if markets and geopolitics are making your skin crawl, perhaps you should do something. If you turn out to be right, you will be glad you took action, however incremental it was. But all your actions should be small, gradual and reversible — in case you turn out to be wrong.

A few such baby steps can make a big difference in your peace of mind during turbulent times.

Start by regarding the risks in your portfolio in the broadest possible light. If you have both some spare cash and a mortgage, use the cash to pay down or pay off the home loan. Extinguishing a 4% mortgage provides you a 4% return at zero risk — a deal you're unlikely to beat anywhere else. Plus, you eliminate the anxiety that debt can cause in an economic downturn.

If you reap a windfall from an inheritance or selling a home, says Elyse Foster of Harbor Financial Group in Boulder, Colo., you could keep that money in cash as a psychological cushion against your fears of an impending crash.

If you dollar-cost average, buying a fixed amount of funds or stocks automatically every month, you could suspend that program, says Peter Lazaroff, co-chief investment officer at Plancorp, an investment-advisory firm in St. Louis that manages about $4 billion. But you should work with your financial adviser to set a predetermined date on which you will resume your contributions — say, six months from now — and agree that if stocks fall by 20% or more, you will automatically begin buying again to take advantage of the decline.

You and your financial adviser should long ago have set a target asset allocation, which determines how much of your holdings you spread across stocks, bonds and other investments. Particularly within a retirement account, where sales won't generate tax bills, you could downshift some of your risks without changing your overall allocations, says Mary Alpers of Alpers Financial Planning in Colorado Springs, Colo.

You might reduce your holdings of volatile growth stocks and put the proceeds in more-conservative shares, for example — leaving your total position in stocks unchanged but reducing your potential losses in a crash.

If none of this enables you to sleep at night, you may be overexposed to stocks. Scale back your allocation — a little at a time. Say you and your financial adviser decide you should reduce stocks from 70% of your portfolio to 50%. You could cut back by 5 percentage points every six months or by 1 percentage point each month. "People respond to that pretty well," says Rick Miller of Sensible Financial Planning and Management in Waltham, Mass. "People like to make changes gradually to help avoid regrets."

At emotionally challenging times in the market, wrote the financial analyst Benjamin Graham in his book "The Intelligent Investor," investors need "some outlet" for their "otherwise too-pent-up energies." Baby steps can keep you from taking big steps you might be sorry about later.

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