7th Inning Stretch?

The longest baseball game in Major League history occurred on April 18, 1981 between the Pawtucket Red Sox and the Rochester Red Wings with the Red Sox winning 3 to 2.   It was 33 innings long and lasted over 8 hours.  Each year about 9% of Major League Baseball games go into extra innings.[1]

Sports analogies are common on Wall Street.  A few analysts have mentioned that the market is currently in the 7th or 8th inning because of its historic rise and current valuation.  They’re speculating that the end is near.

Of course, no one knows when or how the stock market’s run will end.  The fans who attended the Red Sox v. Red Wings baseball game thought they’d see a 9-inning game not knowing it would continue for another 24 innings!  Those who stayed for the entire game endured the equivalent of 3 ½ games.

Stocks can continue to rise despite what people think about the duration of the bull market or their current valuation.  What should you do if you’re concerned about an overvalued market? Here are few suggestions.

  • Asset Allocation. The current rise in the stock market may have pushed your asset allocation beyond your risk level.  Let’s say you purchased an equal amount of the DFA Core Equity I Fund (DFEOX) and the DFA Intermediate Government Fund (DFIGX) Fund on March 1, 2009.   At the end of October your mix is now 77% stocks and 23% bonds.  This is a wide deviation from your original 50%/50% portfolio.  In this case you need to rebalance your portfolio back to your beginning asset allocation.[2]
  • Bonds. Adding bonds to your portfolio will reduce the risk in your portfolio. During the Great Recession the S&P 500 fell 53%.  A portfolio with 50% stocks and 50% bonds fell 26%.[3]   The bonds reduced the risk by about 50%.
  • International. The international markets have done well in 2017 and their current valuations are still attractive.  The capitalization of the United States stock market is about 54% of the world markets with the remainder of the global markets accounting for 46%.   Buying stocks from the U.K., China, Japan, Australia and other countries will diversify your portfolio.[4]   From 1997 to 2016 the U.S. stock market finished in the top spot only once, in 2014.
  • Alternatives. Real estate, gold, and currencies may make sense for a portion of your account.  A weighting of 3% to 5% is recommended.  Alternatives and commodities may offer account protection and an inflation hedge.
  • Cash. Cash is good short-term investment if you’re concerned about a dip in the market.  It will help cushion your account if stocks should fall.  It will also allow you to buy stocks at a lower price.  Long-term, however, cash will lose value because of taxes and inflation.

Baseball is a meandering game with no time clock.  The stock market has no time clock either and it can continue to run indefinitely.  Grab a hot dog, a bag of peanuts, and a drink and enjoy the long-term trend of the stock market.  Play ball!

But do not overlook this one fact, beloved, that with the Lord one day is as a thousand years, and a thousand years as one day. ~ 2 Peter 3:8

Bill Parrott is the President and CEO of Parrott Wealth Management an independent, fee-only, fiduciary financial planning and investment management firm in Austin, TX.  For more information please visit www.parrottwealth.com.

November 28, 2017

Note:  Past performance is not a guarantee of future returns.  Your returns may differ than those posted in this blog.  Investments are not guaranteed.


[1] https://www.beyondtheboxscore.com/2017/8/5/16093390/extra-innings-time-how-long-how-many-average-rule-change, Devan Fink, August 5, 2017.

[2] Morningstar Office Hypothetical Tool.

[3] Riskalyze.

[4] Dimensional Funds 2017 Matrix Book.

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