Stock market valuations have climbed to levels not seen since the dot-com bubble of 2000, sparking concerns among retirement savers about a potential "lost decade" of flat returns. The comparison is real but incomplete.
Today's market differs meaningfully from 2000. Companies generating those high valuations actually earn profits. The tech bubble inflated on speculation alone. That said, elevated valuations do suggest lower forward returns over the next five to ten years. If the S&P 500 trades at 20 times earnings instead of the historical average of 16 times, future gains compress.
Panic selling destroys retirement plans. Investors who sold stocks in 2000 locked in losses before the 2003-2007 recovery. Those who stayed invested recovered everything and more by 2013.
The smarter move for retirement savers is repositioning, not abandoning stocks. Consider these steps.
Rebalance your portfolio. If stocks have grown to 80 percent of your allocation while bonds sit at 20 percent, trim stocks back to your target. Rebalancing forces you to sell high and buy low automatically. A 60-40 stock-bond portfolio still works. Bonds cushion downturns while stocks provide long-term growth.
Increase contributions. A lost decade doesn't erase compounding. Someone age 50 with 15 years to retirement benefits from adding to retirement accounts at lower valuations later. Max out your 401(k) at $23,500 annually if you're under 50. Add $7,500 more if you're 50 or older.
Diversify beyond US stocks. International developed markets in Europe and Japan trade cheaper than US equities. Emerging markets offer growth at lower valuations. A 40 percent US, 25 percent international developed, 15 percent