Asset allocation in a US stock market bubble

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Flybytheseat

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With the US Stock markets currently clearly in a bubble (CAPE (Schiller P/E ratio) at nearly 32 against a historical average of 16.8) and with Trump elected the financial outlook for the US is poor with inflation / stagflation extremely likely over Trump's term. Interest rates will rise, the Fed will continue to print money generating high inflation, asset prices will rise (equities, US Real Estate), crypto will continue up to the ponzi scheme high until it's bubble bursts and the ponzi scheme ends with the bitcoin falling to earth.

Where macroeconomically should people invest if they believe the above to be likely ? You can't be in cash or long term bonds as you'll be wiped out by inflation/ interest rate rises. Will the dollar loose its reference currency designation in the next 10 years with record US national debt and noone willing to buy US government bonds / debt for fear of an inevitable default?

Most multi asset pension funds are heavily US focused with US equities making up 60-80% of their assets. US stocks are clearly overpriced so where can you put your equity investments (Emerging Markets (BRIC, Asia ? ), European Stock (not exactly showing any signs of growth), precious metals (gold/silver/platinum), other commodities, REITs, Crypto (if you've lost all sense)... ?
 
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The sky didn't fall the last time Trump was elected, it won't fall this time either.

The primary differences between the two parties in the US is primarily form rather than substance. That's also true of economic policy.

The stock markets are predicted by Goldman Sachs to average 3% growth a year. That will just bring stock prices in line with the long term average.

Calm.
 
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SquirrelChaser said:
The sky didn't fall the last time Trump was elected, it won't fall this time either.
Click to expand...
We'll have to see if Trump's behaviour is the same this time round. What he's saying and who he's appointing suggest it'll be a bit crazier this time.

As to the question of the OP, Trump's term is only a few years. Investments will recover.
 
Let's not get into a debate about whether it currently is or is not in a bubble right now and focus instead on
Assuming you think it is in a bubble - or assuming you think the market is heading down
What should you do to your asset allocation?


One school of thought is that you do nothing. You should have a long term plan and you should stick with it.
The main thrust of that argument is that trying to time the market is foolish - it's difficult because you have to get 2 timing decisions correct (getting out and then getting back in), and the overwhelming evidence is that the vast vast amount of people do not beat the market when attempting it.

I agree with that particular argument, but my own approach has been to keep 90-95% of my allocation just as I normally would and move 5 to 10% to cash or bonds. Although I have to be honest and say while I have often got the timing right for getting out, I always miss the timing for getting back in, so overall this approach has probably not given me any advantage.
 
Of course I have always been in the accumulation or growth phase of investing.
Maybe the argument is different if you are in the drawdown phase as downturns hit you harder.
So maybe playing some defense is worth losing out on missed upside?
 
I don't think the whole US market is in a bubble; rather a fairly small number of mostly tech stocks are driving up the high valuations. If you are well diversified outside the US and your investment timeframe is 8 years+, continuing to buy and hold is still the smart play.

A small tilt towards US value small cap stocks is worth considering. I've had my eye on something tracking the Russell 2000 index like XRS2 for a while but haven't pulled the trigger.
 
I am not weighing in on whether there is a bubble or not.

The only real way to avoid it is to shift your allocation to bonds. There is some upside in bonds given that interest rates are well above zero now.

I thought anyone holding bonds c. 2018-2021 was crackers as there was little potential for capital gain and a big potential for capital loss. But I wouldn't say that any more.
 
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