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2 Questions That Will Help Save Your Retirement From Sky High Valuations

For months I’ve warned about the historically high valuations in the stock market right now.

But again, the market continued to rise last week and is now sitting near another all-time high.

As of this writing we’re either sitting at the highest valuations of all time or the second highest of all time depending on which metric you’re looking at.

And the only time valuations were higher was right before the Tech Bubble popped in 2000.

Yes, the market is now higher – far higher – valued than it was right before the Great Depression.

Here’s a picture of the Shiller P/E Ratio (cyclically adjusted P/E Ratio) to illustrate how crazy valuations are right now.

This is one important valuation metric to get an idea for how the entire stock market is valued.

See how much its above the 30 right before the Great Depression bubble popped?

Because of this, today I want to show you 2 questions and answers that will help you protect your retirement from sky high valuations.

  1. What Kind Of Stocks Should You Invest In With Valuations At All Time Highs?

A. Growth Stocks
B. Value Stocks
C. No Stocks
D. Dividend Stocks

Correct Answers – B 

Answer Reason – This one’s a bit tricky… But the answer is B.

Investing in growth stocks like Apple, Google, Facebook, etc. during “normal” times is riskier due to high valuations. But is still mostly a sure bet because of how dominant these companies are.

But because of the high valuations in the market – in large part due to growth stocks, investing in these kinds of fast growth stocks is ultra-risky right now.

Why?

Because when valuations are high, it means they have more room to fall.

When this the Tech Bubble popped in 2000 stocks were so overvalued that many of them fell 80%, 90%, and many even blew up completely.

It took 16 years for the NASDAQ – tech stock index – to reach another high because of how far things fell.

And growth stocks are massively overvalued again today due largely to speculation.  I don’t want you to have to wait 16 years to make your money back.

So, you should work to avoid buying new growth stocks in your portfolio right now… And if you own some already, it may be time to sell and lock in profits.

These aren’t the answer.

You should always stay somewhat invested in stocks unless you’re in full retirement drawdown mode, so C isn’t the answer.

What about D… Investing in dividend stocks?

These will continue to perform well with any crash… And you should still own them.  But they aren’t the best investments to own with high valuations.

And because they aren’t the absolute best way to protect your portfolio from high valuations the answer is B – value stocks.

When valuations are high and still rising value stocks often get left behind.

These aren’t the high-flying stocks – typically – that growth stocks are. They’re steadier and more stable.

This is important… But the biggest reason value stocks are your best bet with high valuations is what I say everyday in my articles to you…

These metrics combined show that WMT is massively overvalued right now.

And this means owning its stock does not give you a large margin of safety in investing terminology.

When you invest in stocks that have a margin of safety it makes the investment safer.  And it also means you should expect to earn higher returns owning it in the coming years.

The inverse of this is also true…

When you invest in a stock without a margin of safety it makes the investment riskier.  And it also means you should expect to earn less owning its stock going forward.

With WMT being so overvalued right now, its stock does not give you a large margin of safety.

And for this reason, you need to remain patient and wait to buy it.

If you buy stocks – or even the entire market via an index fund – that are overvalued… It not only makes the investment riskier because it can fall farther… It also means you should expect to earn lower returns going forward in your investment portfolio.

You don’t want either of these in good times… But especially when things are massively overvalued like they are now.

Especially in retirement because it takes a long time to make up for any losses you have.  

I don’t want you to have to go through that.  And this is why you should invest in the best value stocks you can.  If they pay a dividend – even better.

You can see several of these at the end of this article.

2. Should You Panic Over Sky High Valuations And Your Retirement Account?

A. Yes
B. No

Correct Answer – B.

I never recommend any investor panic over any kind of investment, so this is a big no.

What you should do is prepare your portfolio by doing the following things…

Continue to make sure your retirement portfolio is invested in great stocks that have the following traits…

  • They’re cheap.
  • They have little to no debt compared to a lot of cash.
  • They produce large profits and cash flows.
  • They pay dividends.
  • And make sure they aren’t in industries that could be hammered by Covid in case it comes back.

These kinds of stocks – the ones I try to find for you every day – are things you should continue investing in because they will provide you good to great returns no matter what the market is doing.

All while protecting you from the major risks like valuation, unemployment, debt, and inflation.

You should also read some of our recent articles talking about how to deal with inflation below…

And if you’re looking for some specific stocks to invest in to protect your retirement, use the following links.

Your guide to financial freedom and achieving your retirement goals.

Always in your service,

Jason Rivera

Publisher Stock Market Daily

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