By many measures, the US stock market is at or near an all-time high.

This will cause some investors to worry. Should you be among them?

First, the facts:

• The US stock market is highly valued. Its valuation relative to expected earnings is far higher than the average over the last 50 years – about 50% higher. Its valuation has only been higher in the dot com frenzy (2000) and at the end of 2021. Soon after those peaks, the market fell sharply.
• The US stock market is highly concentrated. We have seldom had a higher percentage of stock market value in such a small number of stocks. That means diversification is lower and risk is higher.
• Relative to non-US stocks, the US market has seldom been so highly valued.
• Relative to US government bonds, the US stock market has seldom been so highly valued.

None of these facts guarantees that stocks will fall anytime soon. But the risk of a steep decline means some investors may want to proactively adjust their investments. Here’s who is at risk:

• Investors who don’t think stocks can fall by 25-50%. They can and they have. If you are not prepared for that possibility, you may not be prepared to hold until stocks recover – which they always have. Selling when stocks fall is a sure-fire way to damage your financial plan.
• Investors who don’t have a cushion to spend from when stocks are down. That cushion can be your salary, Social Security benefits, a pension, cash or bonds.
• Investors who think they have reduced risk by stock-picking or by owning different types of investments which are, in truth, equally risky or worse. The example du jour is Bitcoin. There is only one proven way to reduce risk: own high-quality bonds or cash.

If you are at risk, here’s what to do. It’s simple:

1. Determine how much of a cushion you need. We typically recommend having at least 7 years of withdrawals in cash or high-quality bonds. Your multiplier may be different – but probably not a lot different.
2. Sell from your risk investments to create that cushion. Yes, there will likely be gains and a tax bill. But that’s far better than damaging your financial plan by selling stocks when they are down.

To read more, the Wall Street Journal had a thoughtful analysis here.

If you are prepared for a potential market fall, great. If not, you might want to.