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Although there isn’t an early warning system for stock market corrections, there are factors that can tip us off to trouble. We’re seeing some of them right now.
Wouldn’t it be great if there were a reliable way to always track the market’s direction?
Your adviser could keep an eye on it for you – kind of the way the National Weather Service does with hurricanes – and warn you far in advance if a disturbance was brewing that could have an impact on your portfolio. You’d have plenty of time to see where it’s heading and whether the danger might fade, and then decide whether you wanted to ride it out or move your money to something less volatile.
Unfortunately, the way we currently go about forecasting market upheaval seems closer to how they track tornadoes. Instead of days or even weeks of preparation, you might get minutes to run for cover.
On June 1, the Dow sailed past the 21,000 mark on its way to an all-time high of 21,144.18. The S&P 500 and Nasdaq also rose to records. And they’ve already topped those feats since then.
Of course, it’s difficult to focus on building a shelter or mapping an escape route when everything seems so sunny. But experts may tell you that’s exactly when you should be making your plan – before the dark clouds start to gather.
And though there isn’t a tried-and-true tracking system for market performance, there are factors that can tip us off to trouble. We’re seeing some of them right now.
This eight-year bull run, for example. The S&P 500 has averaged a nearly 15% annual rate of return since 2009. Is that something that can continue? It depends on who you ask, of course, and there are plenty of people out there predicting both good and bad for 2018. But I don’t know that a lot of the economic data out there support prices continuing to rise.
One key thing to watch is market valuation, which is definitely going up. The Shiller P/E ratio, a price-to-earnings measure of the valuation of the S&P equity market, is sitting at 29.59 as I write this (June 2). That’s only happened a few times in history: in 1929 (obviously years ago, but a precursor to the Great Depression); in 2000 (before the tech bubble burst); and in 2008.
When stocks are overpriced, it often means the market is due for at least a correction. And though the ratio isn’t intended to time the market, it can serve as a heads-up that it is time to start asking questions.
Also in early June, the yield on the benchmark 10-year Treasury note dropped to its lowest rate of the year, to just a little over 2%. Again, these numbers will fluctuate, but we’ve only had these low rates about 16 times in the past 150 years.
While these events may or may not be signs of a stormy financial future, it may be smart to take some action to help protect yourself in case of the worst – especially if you are near to or early in retirement, when your nest egg is particularly vulnerable to the timing of a market downturn.
The “rule of 100” suggests you subtract your age from 100, and the number you get is about how much equity exposure you may want to have in your portfolio.
The rest of your assets should be in more conservative financial products. It might be bonds – although there’s some concern right now that rising interest rates could make that market less competitive. Or you may want to consider something like a fixed-index annuity to protect some of your principal.
Talk to your financial professional about your risk tolerance and the various options available for preservation.
After all, you’ve probably saved most of your life for retirement. Now that you’re so close, you shouldn’t leave it to the winds of chance.
Kim Franke-Folstad contributed to this article.
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