{"id":335007,"date":"2025-12-08T15:13:20","date_gmt":"2025-12-08T15:13:20","guid":{"rendered":"https:\/\/peraltafinancing.com\/business\/finance\/what-to-do-if-you-think-the-market-is-overvalued\/"},"modified":"2025-12-08T15:13:20","modified_gmt":"2025-12-08T15:13:20","slug":"what-to-do-if-you-think-the-market-is-overvalued","status":"publish","type":"post","link":"https:\/\/fivemor.com\/?p=335007","title":{"rendered":"What to do if you think the market is overvalued"},"content":{"rendered":"


\n<\/p>\n

\n

It\u2019s easy to think the stock market is overvalued. There are so many measures that point in that direction.<\/p>\n

The simplest one is the Cyclically Adjusted PE Ratio (CAPE Ratio)<\/a>. It\u2019s the price to earnings ratio for the S&P 500 and right now it\u2019s over 40. The mean ratio is a bit over 17 and the max it\u2019s ever been, December 1999, was 44.19. <\/p>\n

The CAPE is a useful measure for determining if the market is overvalued<\/a> but the market can remain overvalued for a long time. It\u2019s been over the average since 2009, when it dipped under during the Great Recession.<\/p>\n

Also, remember that there is always a reason to sell<\/a> and the media needs flashy headlines to keep people reading. So, you will read a lot of \u201cAI is a bubble\u201d and \u201ca recession is around the corner\u201d all the time. That\u2019s not to say it\u2019s not true this time, but a broken clock is right twice a day.<\/p>\n

But if you\u2019re concerned that the stock market is overvalued and you\u2019re anxious to do something<\/em><\/strong>, what can you do that\u2019s both responsible and rational?<\/p>\n

\nTable of Contents<\/summary>\n
    \n
  1. Take a Breath<\/a><\/li>\n
  2. Review Your Financial Plan<\/a><\/li>\n
  3. Reassess Your Emergency Fund<\/a><\/li>\n
  4. Rebalance Your Portfolio<\/a><\/li>\n
  5. Make Charitable Donations<\/a><\/li>\n
  6. Do Less, Not More<\/a><\/li>\n<\/ol>\n<\/details>\n

    Take a Breath<\/h2>\n

    If you\u2019re feeling anxious about the market, let me share a few statistics that should help:<\/p>\n

      \n
    1. As I mentioned earlier, the S&P 500 CAPE Ratio has been high for 16 years. It\u2019s been \u201covervalued\u201d for 16 years, even through all the gains and drops.<\/li>\n
    2. Corrections happen often. Every 3-5 years, there\u2019s a bear market in the S&P 500.<\/a> (20% drop)<\/li>\n
    3. Some of the best days in the stock market are during bear markets.<\/a><\/li>\n<\/ol>\n

      The point is this \u2013 don\u2019t try to time the market. You can\u2019t predict the top.<\/p>\n

      Yes, it will go down but then it will go back up.<\/p>\n

      As long as you don\u2019t need the money in the meanwhile, you\u2019ll be OK.<\/p>\n

      \"\"\"\"<\/figure>\n

      Review Your Financial Plan<\/h2>\n

      If you haven\u2019t reviewed and updated your financial plan recently, now is a good time.<\/p>\n

      If you don\u2019t have a financial plan, now is a good time to build one and you don\u2019t even need a financial planner. Here\u2019s guide to building a financial plan without a financial planner<\/a>.<\/p>\n

      It\u2019s important to update your plan whenever you have major life events, such as when you get married, have kids, buy a house, etc. But there will be periods in your life when there are no major events. In those cases, you want to review your plan every year.<\/p>\n

      And remember to review the time horizons of all your accounts. Anything you don\u2019t need for ten years won\u2019t likely be affected by today\u2019s market valuations. Anything cash you need within the next three years shouldn\u2019t be in the stock market, they should be in safe investments like CDs<\/a>, like these:<\/p>\n

      If you\u2019re concerned about the state of the markets, use this time to update your financial plan. It can inform what you do next.<\/p>\n

      Reassess Your Emergency Fund<\/h2>\n

      The stock market may be roaring but your personal financial situation may be different. It may be a good time to reassess your emergency fund and see if it\u2019s something you wish to bulk up.<\/p>\n

      If so, it would be prudent for you to consider boosting it up at a time when the market is up so that your fund will meet your needs in the future.<\/p>\n

      In normal times, you may be comfortable with a 3-6 month emergency fund. If you are in a more tenuous job situation, you may wish to have one that\u2019s 6-12 months of expenses. Only you know your situation and the likely future scenarios, so adjust it accordingly.<\/p>\n

      If you sell assets with gains, set aside some cash for taxes. In an ideal world, you could try to find assets with losses to offset the gains so it\u2019s a tax neutral event.<\/p>\n

      Rebalance Your Portfolio<\/h2>\n

      In your financial plan, you\u2019ll have established an asset allocation for your investments. As a basic level, this allocation is a percentage of stocks and bonds that will help you achieve your goals.<\/p>\n

      The S&P 500 is up over 16% year-to-date and Vanguard\u2019s Total Bond Market Index (BND<\/a>) is up just 3%, there\u2019s a good chance your allocation is no longer matching your targets.<\/p>\n

      You should rebalance your portfolio once a year or whenever your allocations are over 5% outside of your targets. If you started the year with a 90% stock, 10% bond portfolio, you\u2019re now 91% stocks and 9% bonds (assuming 1% and 3% returns). You don\u2019t trigger the percentage threshold but you can still adjust.<\/p>\n

      There are two ways you can do this.<\/p>\n

        \n
      1. You can sell what is above your target (stocks) and buy what is below your target (bonds). <\/li>\n
      2. Allocation future contributions to the asset below targets until it\u2019s back in line.<\/li>\n<\/ol>\n

        The first way will likely trigger tax consequences, so the second way is preferred if you can do it.<\/p>\n

        Either way, if you\u2019re concerned about the stock market being overvalued, putting more into bonds will adjust your allocation back to your targets and assuage your fears about investing into an overvalued market.<\/p>\n

        Make Charitable Donations<\/h2>\n

        You can donate appreciated stock and it\u2019s a big tax benefit.<\/p>\n

        When you donate appreciated stock, you get to claim the market value as a tax deduction if you itemize your deductions. It\u2019s way better than selling the stock and donating the proceeds, since you\u2019ll have to pay capital gains tax on the appreciated amount.<\/p>\n

        If you don\u2019t want to donate appreciate stock to a specific charity right now, you can always donate it to a donor advised fund. Then, over a period of time, you can have the fund make donations on your behalf. You get the deduction immediately, you pay no capital gains, and can dole out the donations over several years.<\/p>\n

        Finally, if you have some losses in your portfolio, now would be a good time to take advantage of tax loss harvesting<\/a>.<\/p>\n

        Do Less, Not More<\/h2>\n

        The best investment portfolios are the ones that don\u2019t get messed with. Our brains work in a fight or flight mentality, both of which demand action.<\/p>\n

        With investing, inaction can often be the best approach. Review your plan, adjust your assets if necessary, and make sure you\u2019re protected with a funded emergency fund. Cash you need in the next three years should be in cash or other safe investments and turn off the news. \ud83e\udee0<\/p>\n<\/div>\n\n","protected":false},"excerpt":{"rendered":"

        It\u2019s easy to think the stock market is overvalued. There are so many measures that point in that direction. The simplest one is the Cyclically Adjusted PE Ratio (CAPE Ratio). It\u2019s the price to earnings ratio for the S&P 500 and right now it\u2019s over 40. The mean ratio is a bit over 17 and […]<\/p>\n","protected":false},"author":1,"featured_media":335008,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[93],"tags":[11209,24855],"dealstore":[],"offerexpiration":[],"class_list":["post-335007","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-finance","tag-market","tag-overvalued"],"yoast_head":"\nWhat to do if you think the market is overvalued - Som2ny Network<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/fivemor.com\/?p=335007\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"What to do if you think the market is overvalued - Som2ny Network\" \/>\n<meta property=\"og:description\" content=\"It\u2019s easy to think the stock market is overvalued. 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