Seven Reasons Why I Just Changed My Portfolio

If I had to name the number one question I’ve received from investors over the past 40-plus years, it’s this one: “Alex, what are you doing with your own portfolio?”

Today I’m going to answer that question, mainly because I’ve made a change recently.

Long-time readers of my columns know two things about me: I’m a long-term optimist on the future of the United States… and I am not a market timer.

The market goes up over the long haul. But a market timer is someone who pretends to know what it will do in the short term.

Anyone can make a good guess now and then, but – trust me on this – no one can accurately and consistently predict what the market will do over the next few weeks or months.

However, I’ve recently made my portfolio more conservative, and – in the interest of full disclosure – I want to share the reasons why:

1. The first one is personal. I’m 68 years old and, while I’m fortunate to be in excellent health, my portfolio is worth more than I will ever spend, as is the case with thousands of readers who have worked, saved, and invested for decades. It makes little sense to risk what you have for what you don’t need.
2. On almost every yardstick, today’s market is at or near the most expensive level ever recorded.
   1. The S&P 500’s price-to-sales ratio is 3.7, a hair below its all-time high. At the end of 2000, with the dot-com bubble just beginning to deflate, it was 1.77. The market today is more than double that.
   2. The price-to-book ratio is about 6.1, against a long-term mean of 3.16. At the end of 1999, the peak of the tech bubble, it was 5.05. Investors are paying about six dollars for every dollar of net assets on corporate balance sheets.
   3. The S&P 500’s trailing dividend yield is 1.04%, the lowest on record. The closest comparison is September 2000, when the yield bottomed at 1.11%, six months before the bubble burst.
   4. Earnings are the exception, but only partly. The Shiller CAPE was 40.6 last month, which ranks in the 98.8th percentile of all months since 1881. Only 20 months were ever higher, all of them in 1999, 2000, or 2026. The all-time CAPE high is 44.2, so on this measure, we’re near the record, not at it.
   5. Profit margins are themselves at a record. Across the whole economy, after-tax corporate profits reached 19.4% of gross value added, the highest since the BEA series began in the 1940s. This is a positive, but it’s worth remembering that margins can also contract.
   6. The market’s total value is enormous relative to the economy that supports it. The Buffett Indicator divides the total U.S. stock market value by GDP. Buffett once called it “probably the best single measure of where valuations stand at any given moment.” It is currently at 235%. The long-term average is about 167%.
3. Interest Rates. In September, the Federal Reserve raised the short-term rate a quarter point, its first hike since 2023. Both the Fed and the financial markets are signaling more increases ahead. And bond yields – which merely normalized at first – recently hit their highest level since 2002.
4. AI Uncertainty. I am bullish on the future of this transformational technology. I recommend – and still personally own – plenty of AI-related companies. But over the medium term, there are not only financial and political risks – especially given the recent backlash over data centers – but the risk of social disruption. This could play out in several unexpected ways and shouldn’t be discounted.
5. Drone Risk. The wars in Ukraine and the Middle East have shown that cheap, easy-to-manufacture drones can cause massive damage. What country has all its most vital assets protected from such attacks by terrorists or other bad actors? None.
6. Taxes Will Go Up. Our nation is more than $40 trillion in debt, and that doesn’t include the many tens of trillions more in federal and state entitlements and pension liabilities. Taxes will definitely go up in the years ahead, especially for folks in my tax bracket. Better to be a step ahead of the IRS than a step behind it.
7. Sentiment Is Euphoric. My hero John Templeton famously said that bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria. Why do I say that investors are euphoric right now? There are records here too. Margin debt recently hit an all-time high. So did assets in leveraged ETFs, retail options trading (especially zero-day options, which expire the same afternoon) and betting on prediction markets. Meme stocks and meme coins are back in play, too. Traders aren’t just speculating. They’re gambling, whether they know it or not.

Looking over this list, you’re probably feeling a little bummed out right now. So let me add a few qualifiers.

The first is that I’ve not shared any secrets here. Some of these factors might be new to you, but they are well understood by the market and therefore already baked into share prices.

(Although it’s worth mentioning that new risks can suddenly appear out of nowhere. You also need to prepare for what you can’t see coming.)

The second is that shareholders who have hung on through thick and thin – the crash of ’87, the first Gulf War, the dot-com bubble and collapse, 9/11, the second Gulf War, the financial crisis, the Great Recession, and the Covid pandemic – have way outperformed market timers who repeatedly jumped in and out of the market.

That’s not a strategy. That’s just guessing.

Don’t get me wrong. Your portfolio should evolve over time in response to new risks and new opportunities. But gradual adjustments are better than wholesale changes.

The biggest reasons I’ve made my own portfolio more conservative are today’s unique circumstances and my age. It’s a safe bet that I still have much more invested in equities than most readers.

My kids are in their 20s and I manage money for both. They have been 100% invested in stocks their whole lives. They remain 100% invested in stocks today. And I’m confident that is the best asset allocation for their age group. What the market does next month or next year is of no concern to them whatsoever.

Despite all the negatives I listed above, the stock market could still move sharply higher in the weeks and months ahead. And we already know what the market does over the long haul.

I have not fled to cash – and never would. I simply changed my portfolio from more aggressive to more moderate by adjusting my asset allocation. Today I’m just letting you know.

Here’s the main point…

If your portfolio has high-quality securities, broad diversification, a sensible asset allocation, low expenses, and is also tax-managed, you’re bulletproof… no matter what happens in the short term.

So, enjoy your weekend. Enjoy your life.

You may have more money than ever before… but you also have less time.