Since the bull market is so old, what are you doing to protect your investments in case there is a downturn in the stock market?

The question implies that the stock market has run up for too long and is bound to go down sharply. Stocks ultimately go up do to two major forces:

1. Supply/demand pressures. Will demand let up? I don’t see a reduction in that any time soon given continued buy backs by companies, strong corporate growth, and the bond yields that are equivalent to dividend yielding companies (eg bond rates are still not that appealing). Here are two articles to support this position:

The Stock Market’s Next $1 Trillion Milestone: Buyback (https://www.nytimes.com/2018/08/06/business/dealbook/the-stock-markets-next-1-trillion-milestone-buybacks.html).

https://finance.yahoo.com/news/1-5-trillion-corporate-cash-110058955.html (https://finance.yahoo.com/news/1-5-trillion-corporate-cash-110058955.html)

1. Valuation. Are valuations too rich? If you go to the standard case shiller ratios he would say yes. I would say the EPS figure in the denominator is backward looking, not inflation adjusted, or adjusted for the Trump tax cuts. What does that mean? This measure is not relevant and just a headline grabber. So what should you use? The best measure for a retail trader is the PEG ratio, Enterprise Value to Sales, and Enterprise Value to EBITDA….. and more importantly the relative value of these ratios to other stocks. These values can be seen on yahoo finance and google finance easily under the statistics sections. Tesla stock compared to GM stock as an example shows Tesla has a lot of risk. Tesla May will be a good stock long run but it has a lot more risk…. If there is a downturn typically the stretched stocks take the hit first. Everyone hates on wall street analysts but they all do bottom up valuations and if your stocks have a lot of neutrals or sell positions…. Those stocks are likely overvalued (neutral is a nice way of saying I don’t see a compelling reason to buy this stock). A lot of the research and talking heads continue to point to a “rolling recession” where certain industries have stock pull backs…. Technology stocks have had some issues recently.

So what should you do? I advise:

1. stay the course – what is your allocation strategy for where you are in life and the goals of the portfolio and are you following it? With the run up most people’s allocations to stocks is overweighted at this point.

2. If you have some stretched valuations on some of your stocks …. You should at least know you are taking risk. Then decide if it is worth the risk to you.

3. If you don’t want to shift into bonds to de-risk your portfolio I would recommend you look at the large dividend etf funds. A lot of diversification and cash flow from dividends to offset valuation declines if they occur.

4. If you have a $500,000+ Portfolio and you are not sophisticated with investing, you really should be working with a financial advisor who can help buy and maintain portfolio insurance with several option strategies.