When chaos visits the stock market

As discussed ad nauseam in the financial press and in mutual fund literature, stocks “always” rise over the long-term.

This may very well continue to be true.

But, in my opinion, you also should remember that you have limited amounts of capital, and your cash might be better invested elsewhere.



Even after the recent selloff, the S&P 500 still trades at a cyclically adjusted price-to-earnings ratio (CAPE) of 27.

That means, in my opinion, that this is still one of the most expensive markets in history.

I think other metrics, such as the price-to-sales ratio, tell a similar story.

Realistic Expectations

This doesn’t mean that we have to have a major bear market, and stock returns may be soundly positive in the coming years.

But, in my view, it’s not realistic to expect the returns over the next five to 10 years to be anywhere near as high as the returns of the previous five to 10 years, if we’re starting from today’s valuations.

In my opinion, history suggests they’ll be flattish at best.

Fixed Income

It’s not hard to find five-year CDs these days that pay 3.5% or better. That’s not a home run by any stretch, but it is well above the rate of inflation and it’s FDIC-insured against loss.

High-quality corporate and municipal bonds also sport healthy yields these days.

And beyond traditional stocks, bonds and CDs, I think you should consider diversifying your portfolio with alternative investments or strategies.

Risk Profiles

Options strategies or commodities futures strategies might make sense for you.

Or if you want to get really fancy, perhaps factored accounts receivable, life settlements or other alternative fixed-income strategies have a place in your portfolio. The possibilities are limitless, in my opinion.

Obviously, alternatives have risks of their own, and in fact might be riskier than mainstream investments like stocks or mutual funds.


So you should always be prudent and never invest too much of your net worth into any single alternative strategy.

Just keep in mind that “investing” doesn’t have to mean “stocks.” And if you see solid opportunities outside of the market, don’t be afraid to pursue them.

The following is an excerpt from What to Do Now If You’re Losing Sleep Over the Stock Market, originally published by Kiplinger’s.

Photo Credit: Steve Jurveston via Flickr Creative Commons

Disclosure: Certain of the information contained in this article is based upon forward-looking statements, information and opinions, including descriptions of anticipated market changes and expectations of future activity. The author believes that such statements, information, and opinions are based upon reasonable estimates and assumptions. However, forward-looking statements, information and opinions are inherently uncertain and actual events or results may differ materially from those reflected in the forward-looking statements. Therefore, undue reliance should not be placed on such forward-looking statements, information and opinions.