Howard Gold’s No-Nonsense Investing: Five things to do when every investment is too expensive http://ift.tt/2xWStex

This week’s cover story in The Economist, “The bull market in everything,” summed up the state of global markets pretty well.

Like some of that prestigious magazine’s longer pieces, it’s a deeply reported, elegantly written rehash — we’ve known much of this for a while, but it’s worth repeating.

Stocks are selling at Shiller P/E ratios (prices divided by 10-year average earnings per share, adjusted for inflation) of around 31x, almost where they traded in 1929 but roughly 30% below the all-time high of almost 44x in 2000.

Yields on U.S. Treasury bonds and investment-grade corporate bonds are up nicely from last year’s record trough, but they’re still near multiyear lows. (Bond yields move in the opposite direction of price.) Spreads between high-yield and investment-grade corporate bonds are the tightest in more than three years.

Money market funds are still paying slightly more than a paltry 1%, about in line with the federal funds rate, as the Federal Reserve takes its time “normalizing” rates.

All of this comes amid much lower inflation, an aging population and a glut of corporate cash. And despite the historically rich valuations of almost every asset class, we’ve seen some signs of complacency — the CBOE Volatility Index

VIX, +1.42%

  has crept up from its late-September lows, but is still barely above 10 — but few obvious indicators of euphoria.

OK, so after eight and a half years of a bull market, what do you, who are investing for retirement or your children’s college education, do now? Here are five ideas:

1. Stay in stocks, but keep a sharp eye on your allocation. Stocks’ big move this year — the S&P 500

SPX, +0.18%

 is up 14% — has probably overweighted your holdings toward equities. Especially if you’re within five to 10 years of retirement, I’d rebalance now, and maybe reduce your target a bit to protect against rising risk.

2. Move away from overheated sectors like the FAANG stocks toward unloved areas. I’m no fan of depressed utility shares, because barring a recession (which seems far off), interest rates are probably headed higher. But value stocks have underperformed for so long — the iShares Russell 1000 Value index ETF

IWD, -0.02%

 trailed its growth counterpart by 45% to 25% over the past three years — and are so, well, undervalued, they have a very favorable risk/reward ratio for patient, long-term investors. I also prefer domestic value to international and emerging market stocks, which on the surface are more attractively priced than U.S. stocks but would be much more vulnerable to any war in Asia involving North Korea (see below).

3. Don’t bet on bonds. Unless there’s a recession or a huge international crisis (again, like North Korea), the 35-year bull market in bonds peaked last July when 10-year Treasury notes

TMUBMUSD10Y, -0.91%

 yielded below 1.4%. On Tuesday, the yield was 2.33%, nearly 100 basis points higher. The Fed may be taking its time, but it will raise the fed funds rate and shrink its $4 trillion-plus balance sheet over the next few years, so yields will rise and bond prices will fall. I’d start locking in profits from long-held Treasury bonds, muni bonds and investment-grade corporates, and avoid high-yield and emerging market bonds, where you’re simply not getting paid enough to take the additional risk.

4. Cash is a growth opportunity. It’s the opposite of glamorous, but as risk rises along with interest rates, cash will look more attractive in the years ahead — more for what it isn’t (risky) than for what it is. Over the next few months, I would start taking profits in stocks and begin building up a cash position.

5. Own some gold. For years, I’ve been negative on gold, which I wrote has been in a long-term, secular bear market. It may still be, but gold has made some impressive gains: shares of producer Newmont Mining Corp.

NEM, +0.47%

 have more than doubled in a little over two years.

Gold’s recent advances have come along with the heightening crisis over North Korea’s nuclear program in which the country’s unstable leader Kim Jong Un and our own fragile President Trump have ratcheted up the rhetoric to the point where accident and miscalculation could lead to catastrophe.

On Sunday, Republican Sen. Bob Corker, chairman of the foreign relations committee and a one-time contender to be secretary of state, told the New York Times that the president’s reckless talk could set us “on the path to World War III.”

When a serious man like Corker is so devastatingly blunt, we should listen. I still think there’s a 25%-50% chance of a war in Asia by next year, but I now put the chance of a regional nuclear exchange at 10%-20%, up from my 5%-10% estimate during the summer.

With that cataclysmic risk even remotely on the horizon, buying insurance by putting 5% of your money in gold is the least you can do.

Howard R. Gold is a MarketWatch columnist and founder and editor of GoldenEgg Investing, which offers exclusive market commentary and simple, low-cost, low-risk retirement investing plans. Follow him on Twitter @howardrgold.