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Seeking investments that are fairly valued today is like looking for a needle in a haystack. After a 10-year bull market, there are slim pickings in this frothy market. It reminds me of 1998, when I was looking for value stocks during the dot com boom. Everything was richly valued.
Fortunately, I didn't go all in then, so was only modestly damaged by the horrendous S&P 500 losses of 9.03%, 11.85% and 21.97% during the bust years of 2000 through 2002.
Now, I'm not saying that we're due for three losing years, but the future is unknowable. And, markets have periodic down years. Yet, running for the hills, going into all cash isn't the solution either. After all, as economist John Maynard Keynes brilliantly said, "The market can stay irrational longer than you can stay solvent."
How Overvalued Is the Market?
The U.S. stock market is more richly valued than it has been since the turn of the century. The current Shiller PE ratio is 32.54 and the mean ratio is 16.85. The Shiller PE is a price earnings ratio that divides the current price of a stock or index by the inflation-adjusted earnings from the previous 10 years. It's a popular way to compare the valuation of stocks and indexes today with historical averages.
So, here's where to invest in a frothy market.
1. Cash Investing
After years of near-zero interest rates, cash isn't such a bad place to be anymore. If you're skittish about the U.S. stock market valuation today, you can get paid to wait for fairer valuations by investing in cash.
Granted this is a capital preservation strategy, not a growth approach. Yet, sometimes cash preservation is a wise tactic, especially in a richly valued investment market.
So, the easiest cash investments are money market funds and CDs. Eschewed by investors, CDs aren't so silly during a rising-interest-rate environment, with richly valued equities. Currently, you can get a six-month Ally CD paying 2%, a one-year Capital One CD with a 2.3% yield and Sallie Mae pays 2.8% for a two-year CD.
2. Bond Investing
You can buy individual bonds of varying quality and maturities to increase your fixed yield. For example, Prudential Financial offers an A-rated bond maturing in 14 months, selling at a discount, with a 2.834% yield to maturity. Go out a bit further on the yield curve and you can garner a three-year A-rated corporate bond with a yield to maturity of 3.88%.
And municipal bonds are quite competitive as well with the average A-rated one-year muni offering a yield to maturity of 2.72%. (All data from Schwab Fixed Income Offerings on June 29, 2018)
For investors more comfortable with funds, Vanguard's Short-Term Corporate Bond ETF (VCSH) fund currently yields 2.37%. As interest rates rise, expect the yields to follow.
3. Undervalued Stock Investing
Stock pickers can search the screeners for stocks with a low price-to-earnings ratio and investigate whether the resulting companies have come back potential. Or if that's too much, do a quick Google search and you'll come up with various lists of undervalued gems from a variety of sources.
Morningstar goes bold with a listing of 28 undervalued stocks from various sectors. Damien Conover, Morningstar's director of healthcare equity research touts the communications sector as the most undervalued with a price to fair value ratio of 0.86. Large-cap drug and biotechnology also offer some bargains.
International companies, China Mobile (NYSE: CHL ) and Telefonica S.A. (NYSE: TEF ) are among the companies on Morningstar's undervalued list, and I think they may be worth a look.
A few consumer cyclical stocks from their list might be ripe for the picking right now - specifically I'm looking at Mattel (NASDAQ: MAT ) and Hanesbrands (NYSE: HBI ). Toys and underwear never go out of style!
4. Affordable Global Growth Sector Investing
Emerging markets are projected to grow exponentially faster than sluggish developed-world and U.S. investment markets. The fastest growing emerging markets are China, Russia, India and Indonesia.
To capture the entire emerging-market sector, consider diversified emerging market ETFs like iShares MSCI Emerging Markets ETF (NYSEARCA: EEM ) or iShares Core MSCI Emerging Markets ETF (NYSEARCA: IEMG ). These offer access to an array of countries, allowing you to access growth the world over.
If you'd rather focus in on one area, there are many individual country funds from which to choose. The SPDR S&P China ETF (NYSEARCA: GXC ) tracks the total return of the S&P China BMI index. If you'd rather have exposure to 79 large and mid-cap Indian companies, the iShares MSCI India Fund (BATS: INDA ) does the trick.
Other global markets with growth potential include Singapore, Austraila, Korea, Spain, Italy and the Netherlands according to Gurufocus research. Whatever your favorite place to invest, you can probably find an ETF to suit your needs.
5. Robot Investing
Finally, there are low-fee digital investment services that will manage your investments and employ an active approach to calm portfolio volatility. Qplum , offered through their own website or as an option with Interactive Brokers, is a hedge-fund-like platform that actively manages your investments to maximize returns and circumvent the excessive risk that comes from a buy-and-hold approach.
In other words, they offer to make smart investment choices for you, in a frothy or other market environments.
Several other active robo-advisors use advances in technology to help you navigate the investment markets with sophisticated investment management. If you're not a DIY investor and don't relish paying 1% or more to a financial advisor, there are digital investment platforms that will manage your investments for you.
In sum, no one can accurately predict future investment market performance. Despite rich valuations, we might be in for another year or two of positive investment returns. Just have some extra cash on hand to deploy for bargains after the next bear market and choose your current investments judiciously.
Barbara A. Friedberg, MBA, MS is a veteran portfolio manager, expert investor, and former university finance instructor. She is editor/author of Personal Finance; An Encyclopedia of Modern Money Management and two additional money books. She is CEO of Robo-Advisor Pros.com, a robo-advisor review and information website. Additionally, Friedberg is publisher of the well-regarded investment website Barbara Friedberg Personal Finance.com. Follow her on twitter @barbfriedberg and @roboadvisorpros. As of this writing, she does not hold a position in any of the aforementioned securities.
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