When we consider past stock market cycles, there are occasions as noted in the graph of investor emotions, euphoria sneaks in. Are we there now? Hard to say, but it is a good time to look at how our 401k, Roth IRAs and other investment accounts are positioned. How much is invested in stocks vs. bonds, International vs. Domestic and so forth.
As the stock market rises, our portfolios can automatically tilt towards risk, as bonds currently offer truly little total return, while stocks have risen over the past few years, as measured by the S&P 500 Index, and this throws off our target allocation.
One important question to ask ourselves: How does the stock market value look today compared to history?
Robert J. Shiller, Sterling Professor of Economics at Yale University, developed the CAPE Ratio to put a valuation measurement on the S&P 500 Index. As of February 2021, that value measured 35.83, as seen in the graph below. While this does not necessarily mean we sell everything and move to bonds or cash, it is prudent to look at the risk in our portfolios, versus our personal risk profile. In addition, we may want another opinion in our portfolios, especially if we are within 5-7 years of retirement.
TheInformedRetiree.com has a risk assessment quiz that takes about 3-5 minutes to complete. It’s prudent about every 3 years to update your profile to make sure you’re investing based on your current risk profile. Life and situations in our lives change, and we must adapt to them, even with our investments. Click here to access the assessment profile.
If you would like to read my book, The Informed Retiree, visit my website www.TheInformedRetiree.com or send me an email to [email protected].
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Advisory services offered through J.W. Cole Advisors, Inc. (JWCA). Global Wealth Solutions and JWCA are unaffiliated entities