Stocks staged a death-defying recovery in Q1.
In fact, they did something they haven’t done in more than 80 years: after dropping more than 10% at the start of the year, they finished the quarter in the black.
Unfortunately for you, there’s a downside to this news:
After their Q1 rally, stocks are expensive again—and that suggests that their long-term returns will be terrible.
According to a special indicator we use (it’s known as the "Buffett Indicator"), stock market returns are estimated to be just 2% per year for the next twelve years.
How are you supposed to retire on 2% per year?
Here’s what I’m going to do...
Valuation Can Predict Returns
Before I show you how I’m planning to grow my nest egg over the next 12 years, let me explain why we’re so confident about this market prediction.
As you know, if you invest when the market is “cheap,” your returns will generally be strong.
If you invest when it’s “expensive,” however, not only will your long-term returns be dismal, but you’re putting yourself at risk for some nasty short-term losses.
So how do we know whether the market is “cheap” or “expensive”?
One of our favorite valuation tools is something called the “Buffett Indicator.”
I’ll explain how it works in a moment, but for now, know this:
Right now, this indicator is telling us that the market is overvalued by more than 100%.
What’s “The Buffett Indicator”?
Warren Buffett, perhaps the most successful investor in history, has taken a simple but incredibly effective approach to investing:
He buys stocks when they’re cheap, and sells them when they’re expensive.
To figure out when stocks are cheap or expensive, he devised a special tool…
In fact, in a 2001 interview with Fortune Magazine, he called it “the best single measure of where valuations stand at any given moment."
It’s known as the “Buffett Indicator.”
Simply put, it compares the price of the overall stock market to U.S. GDP.
As you can see in the following chart (courtesy of financial advisor Doug Short), the Buffett Indicator currently stands at 119%. In other words, the market is overvalued by more than 100%.
And what happens to the market once it reaches a level like this?
Short-term, it becomes vulnerable to a major tumble…
And long-term, your returns tank.
An Accurate Predictor
As you can see, the Buffett Indicator is remarkably accurate at predicting future market returns.
For example, take a look at what happened in the late 90s when we crossed the 100% threshold:
As you probably remember, stocks tumbled.
If you’d owned stocks at the 2000 peak, rode the bear market all the way down, then rode it back up again to its 2008 peak, guess what your returns would have been over that period?
Just 2.86% per year.
The same thing happened in 2008:
We crossed the 100% line, the market tumbled—and returns for the next several years were horrible.
Now look where prices are today: 119%. It’s the same thing all over again. This is a dangerous level.
The fact is, if you believe in history and the Buffett Indicator, dismal returns are ahead for the next dozen years.
But there’s a silver lining to this situation...
Here’s What To Do Now
There are two crucial actions you should consider taking:
1. Take some profits off the table. For example, if you have short-term trades that are in the black, or longer-term positions that are up significantly, consider selling them now—and buying them back later at cheaper prices.
2. Even more importantly, now would be a smart time to start shifting some of your capital into different types of assets—assets that tend to perform well during “down” markets.
For example: Private Equity.
As I explained last week, when the market and the economy are performing poorly, private equity investors make the most money.
So if you’ve never invested in private equity before, now is the time to get ready…
That’s because a new law goes into effect just five weeks from now: Title III of The JOBS Act.
This law will allow all U.S. citizens to invest in private equity, regardless of your net worth or income.