Increase International Exposure
I’ll start with an uncomfortable truth: U.S. stocks, as a whole, are overvalued and priced to deliver sub-par returns going forward. The S&P 500 trades for nearly 19 times earnings. To put that in perspective, the average over its history has been 15.5, meaning that U.S. stocks are over 20% more expensive than average.
The cyclically-adjusted P/E ratio, or “CAPE,” which uses a 10-year rolling average of earnings to smooth out the fluctuations of the economic cycle, also points to an expensive market. Currently at 25.6, the CAPE has only been this expensive a handful of times in history.
Yet overseas, we see a very different picture. CAPE ratios in much of Europe and in emerging markets are at or below their long-term averages.
Most 401k plans have at least a couple options for “international” or “global” funds. Consider upping your allocation to non-U.S. stocks to 50% or more of the portion of your portfolio allocated to stocks.