American economy has been termed a House of Cards by some, waiting to come tumbling down with any future unfortunate natural or man-made disaster.
There has been a depression every 7 years.
With the next year being the Schmittah year, the end of one more 7-year cycle in 2015 [1987, 1994, 2001, 2008], the worsening global political climate and wars and the dollar in fear of drastic devaluation, what are Americans thinking and doing ?
Converting stocks into bonds and money market funds, en mass ?
Buying gold and silver coins and biscuits ?
What ? O wise one. @Southie What ? Please enlighten us.
Not being an economist, I make no effort in predicting the direction of the economy. All I do is look at valuations.
Based on the Shiller CAPE ratio the mkt p to e is 27. The median ratio is 16 So 68 pct overvalued.
The ratio based on last 12 months earnings is about 19.3. The median for this may be 14.5 so 35 pct overvalued.
The ratio based on forward 12 months is 16.7. Median may be 13. So about 38 pct overvalued.
So however you dice it market 35 to 68 pct overvalued.
Or at the minimum 15 to 30 pct overvalued.
We have been rebalancing all the way. And also moved more to cash. Abt 67 stock 33 cash. From 78 to 22 few months back.
As I mentioned in whither the mkt thread a simple rebalancing ( with same asset allocation) would suffice. I just did a bit more. Changed asset allocation slightly. Tilting to cash. Took more off today in fact
Bonds are not exactly cheap either. I don't know gold. So I don't own it.
Whatever ur asset allocation, if u stick to it you are doing fine. I can't in good conscience ask folks to CHANGE THEIR asset allocation. But I have changed it from 78 stocks 22 cash to abt 67 stocks 33 cash. (Will do exact calf and post it)
I now have a formula. For every point move up of snp 500 a fixed in stock is moved to money market. It has worked well last 3 odd months. When mkt dropped 10 pc5 thru Oct 18 I stood pat. Didn't think it had gone down enough to put money back in.
End of the day - keep it simple. Have asset allocation in place. And rebalance.
I like market volatility. Volatility to me provides opportunity. It is OVERVALUATION that is unsafe. History has shown that if you simply dollar cost average, you do all right. In spite of periods of over valuation. Because there r also periods of under and fair valuation. And the market over long term goes up.
I prefer to use
1) sticking to asset allocation
2) periodic rebalancing
In this case since mkt has gone up for 5.5 yrs and is up more than 3X, this would mean selling some stock funds and putting in money mkt to bring asset allocation back in line.
Personally I went slightly against my own rule. And changed asset allocation from 78 stocks to 67 stocks. Rest in cash (cds money mkt)
For brokerage act all cash in money mkt. I hear they r safe. Am not an expert. Don't know if brokerage money mkt is fdic insured.