Business & Investment

Overvalued Stock Markets: Three Things Investors Must Do

According to the Schiller CAPE ratio, the Canadian stock market is trading at a higher level than in 2019. Sibris Research Record Canada’s stock market S & P / TSX composite As a proxy, the Schiller CAPE ratio in mid-2019 was about 23.7, compared to 25.5 in mid-2020.

As the stock market becomes more and more expensive, there is a growing turmoil that the market will retreat. Careful stepping into the overvalued stock market is more alarming than ever.

Don’t panic: keep investing

After seeing the stock market trade at an incredibly high level, some investors can quickly sell and sit on a pile of cash to unfold into a market crash.

However, it is not a wise decision to panic and sell out of the stock market. The stock market can remain absurd for a long time — no one knows how long.

Therefore, keep investing to profit from the long-term rise in the stock market. If you feel uncomfortable because you have too much capital to invest in your stock, consider reviewing your portfolio and selling it systematically. This can mean that you will at least partially benefit from overgrown, expensive stocks and positions.

Accumulate more cash than usual

Planned sales of stocks allow you to accumulate more cash than usual and increase the amount of cash you can deploy in the event of a market correction.

You can also transfer some of your growth stocks to more defensive, high-quality dividend stocks. Dividend stocks generate regular dividends, increasing income and allowing you to accumulate more cash for your investment.

With proper evaluation Nova Scotiabank, Emera, BCE, Granite real estate, Etc. could be great dividend stocks to hold for stable cash generation. For other dividend stocks, check out Other Canadian Dividend Aristocrats. These tend to increase dividends over time.

A solid income-focused dividend stock portfolio can generate a safe yield of 3-5% in today’s expensive stock markets. A $ 100,000 dividend portfolio with a 4% yield generates $ 4,000 in annual revenue.

Update the stock purchase list

Often, about 10% of market corrections occur for 30-50% of market crashes. In most cases, buying with a dip of 10% or more of high quality stocks is a good strategy to follow to get good long-term returns.

Canada’s stock market has risen significantly since the pandemic market crash in March 2020. In the meantime, there was a drop of less than about 8%.

The market is now much more expensive as it has risen since it hit a record high earlier this year.

Just by observing the S & P / TSX Composite Index, you can see that the Canadian stock market has been adjusted by 10%. It may be a clue to buy some stocks.

However, updating your own stock purchase list for your range of purchase target (or your dividend yield target to buy) may suggest a safer entry point that requires a correction greater than 10%. You will know when it may be attractive to invest only if you have an updated stock purchase list!

Stupid takeaway

In an expensive market like today, you may feel that you need to do something, such as profit. However, in some cases, the best move is no movement. Depending on your stock portfolio, it may be better to sit in your hands.

To benefit from long-term stock returns, investors must be patient with holding stocks of good companies for long periods of time and waiting for attractive valuations to buy great businesses.

This article represents the opinion of a writer who may disagree with the “official” recommendation position of the Motley Fool Premium Services or Advisors. We are Motley! Asking investment treatises, even our own, can help you think critically about your investment and make decisions to be smarter, happier, and richer. As a result, we may publish articles that may not match recommendations, rankings, or other content.

Motley Fool recommends BANK OF NOVA SCOTIA, EMERA INCORPORATED, and GRANITE REAL ESTATE INVESTMENT TRUST. A stupid contributor, Kay Ng, does not have a position in any of the shares mentioned.

Overvalued Stock Markets: Three Things Investors Must Do Overvalued Stock Markets: Three Things Investors Must Do

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