The following is an excerpt from What to Do Now If You’re Losing Sleep Over the Stock Market, originally published by Kiplinger’s.
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 you also should remember that you have limited amounts of capital, and your cash might be better invested elsewhere.
Stocks are not the only game in town.
Even after the recent selloff, the S&P 500 still trades at a cyclically adjusted price-to-earnings ratio (“CAPE,” which measures the average of 10 years’ worth of earnings) of 27, meaning that this is still one of the most expensive markets in history. (Other metrics, such as the price-to-sales ratio, tell a similar story.)
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 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. History suggests they’ll be flattish at best.
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 iswell 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, you should consider diversifying your portfolio with alternative investments or strategies. 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.
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.
To read the rest, please see What to Do Now If You’re Losing Sleep Over the Stock Market
Charles Lewis Sizemore, CFA, is chief investment officer of the investment firm Sizemore Capital Management and the author of the Sizemore Insights blog.
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