In my last post I pointed out that from a longer term
valuation standpoint the market isn’t a screaming long-term buy. Before we get into how investors can navigate
the secular bear market trend, here are some caveats with CAPE:
- Not very reliable over the short term.
- Given the above, low CAPE can go lower and high CAPE higher (i.e. can’t time the market with it).
- It’s only one measure.
- Innovation could alter the secular trend.
I am still under the assumption that the secular trend we
are in is bearish. That doesn’t mean
ditch your stocks now; however, there are things you can do:
- Temper your expectations: an annualized return of roughly 10% to 15% is going to be tough to achieve.
- Linear is dead: the relative linear movement of equities from 1982 to 1999 is probably not coming back for awhile. It is likely to return, but not until the secular bear cycle runs its course. So expect the choppiness to continue.
- Risk On, Risk Off: this isn’t to say go from 100% cash to 100% stocks at the drop of a hat, but take profits when you can and rebalance when needed. Further, it wouldn’t hurt to dial risk back when markets get frothy.
- Have a plan on the downside: be aware of the trend: this seems obvious, but today it can be easy to get caught up in the news and confuse noise with signals.
- Preserve capital: this one is the key. Don’t suffer catastrophic losses.
- Stay up the quality chain: similar to the above, but this way when the market moves down you don’t catch all of the downside.
- Diversify PROPERLY: realize that asset class correlations tend to be closer to 1 and -1 right now and can change quickly. Further, past correlations don’t mean that future correlations will hold.
