Worried about a market bubble? Here are 4 tips to protect your wallet
You may have heard that the stock market is soaring, and so is the housing market. Cryptocurrencies have been on the rise – at least until recently.
The economy is coming back to life after a year of pandemic-induced shutdowns and most assets are booming with it. But you are paying a high price for a positive investment outlook, and value-conscious buyers may struggle to find good deals amid today’s high prices.
So what can you do if these high prices make you squirm? Below are some tips on what to do when almost everything is already set up and feeling a little sparkling.
1. Avoid madness
What you don’t have can be just as important as what you do. A good first step to avoiding injuring yourself in an overheated market is to make sure you avoid the hottest areas. Recently, that has meant avoiding so-called memes stocks like AMC Entertainment, GameStop, and Bed Bath & Beyond. Huge price swings get a lot of attention in the short term, but in most cases their underlying businesses face serious problems and may struggle to earn enough for shareholders to justify their current valuations.
Instead, make sure that the stocks – or equity funds – in your portfolio are focused on profitable companies that are likely to continue to grow over time. Remember, stocks are not just prices flashing on a screen, but represent real ownership interests in a company. Actions should track the performance of the business over time.
2. Embrace boredom
It’s also a good time to make sure you’re taking care of the essentials. Take a look at your 401 (k) or other pension plan and make sure that you are contributing enough to receive any matching offered by your employer, and that the funds are invested in simple index funds that are not overly exposed to market fluctuations. high potentials.
There are many trendy investments that have generated outsized returns in recent years, such as Tesla and Zillow. These companies may generate bountiful profits for shareholders someday in the future, but with their high valuations, you might find others that offer more of a bargain today.
Instead, consider regular producers with solid dividend yields and reasonable valuations. Companies like this are not expected to double or triple in the near term, but are expected to generate attractive returns in the long term compared to many hot stocks in 2021 whose underlying businesses are generating little to no profit.
Consider investing in ETFs or mutual funds that own companies with consistent dividend payouts over the years instead of chasing after the hottest names of the month in the crypto space or the latest IPO. technological.
3. Don’t look for returns
Savers and investors who depend on the income from their investment portfolios are no doubt aware of the paltry returns currently offered by most fixed income investments. Just 10 years ago 10-year US Treasuries were yielding around 3%, five years earlier they were offering over 5%. Although low, this yield has helped generate income for both savers and retirees, whereas today the same bond only offers about 1.5%. These record high rates may cause some to look elsewhere for income, but investors should be careful not to seek higher returns and unknowingly take on more risk.
Risky corporate debt, or junk bonds, can be a popular place to look for an increase in yield when government rates are low, but bonds are typically issued by companies in poor financial health and can be at risk of default. interest payments. Their prices would also drop if interest rates rose to more normal levels.
If your returns have been affected by low interest rates, resist the urge to look for extra return on riskier investments. Better to adjust your spending habits to the low interest rate environment than to risk a permanent capital loss by seeking yield.
4. Consider keeping cash in your wallet.
Most people agree that silver is a lousy long term investment. It is virtually certain that it will lose value over time, but one thing it can add to your portfolio is optionality. If you think that most investment opportunities today are not attractive, money gives you the ability to quickly seize opportunities in the future, although the time when they might present themselves may not always be. not clear.
Granted, holding cash can be psychologically difficult, especially in speculative environments where everything seems to be going higher. It doesn’t feel good to have the money just sitting there and earning next to nothing. But when market emotions inevitably tip in a more frightening direction, holding money today could prove to be invaluable.
If you’re concerned about today’s high valuations, consider holding 5-10% of your portfolio in cash and cash equivalents – this is one of the most opposite investments you can make.
At the end of the line
Almost all financial assets have grown significantly over the past year, leaving valuations high and expectations of future returns low. Be sure to limit your exposure to the more speculative areas of the market, such as memes stocks and cryptocurrencies.
Consider holding part of your portfolio in a very liquid investment, such as a money market fund, to be better positioned to seize future opportunities. Make sure you take care of the basics and consistently contribute to a workplace retirement plan like a 401 (k). Remember that slowness and consistency usually wins the investment race.