Should You Protect Your Portfolio Right Now?

You've probably felt it. That nagging concern when you check your portfolio and everything looks great - maybe too great. The voice in your head asking: "Shouldn't I do something? Lock in gains? Move to safety?"

You're not alone. With markets hovering near record highs and valuation metrics flashing warning signs, many investors are wondering if now is the time to get defensive.

Let me share what the data actually tells us—and why the answer is more nuanced than you might expect.

Let's start with what's true. By historical standards, stocks are expensive right now.

The Shiller CAPE ratio—a measure that compares stock prices to average earnings over the past decade—currently sits at 39.74.¹ The historical median? Just 16.03. We're talking about valuations more than double the long-term norm.

The concern is valid. When you pay more for each dollar of earnings, future returns typically suffer. High valuations have preceded market corrections before.

So the worry makes sense. But here's where it gets complicated.

In 2015, the CAPE ratio was already elevated at around 27. Market forecasters warned that stocks were overvalued and returns would disappoint.

What happened next? The market delivered double-digit annual returns for most of the following decade.²

Here's the uncomfortable truth about valuation metrics: they're terrible at telling you when to act.

Think of it like this—knowing that a house is expensive doesn't tell you when its price will drop. It might happen next month, next year, or five years from now. Meanwhile, you might miss years of living in that house (or in our case, years of market returns).

Research from Vanguard found that while CAPE does have predictive power for 10-year returns, it only explains about 43% of what actually happens.³ That's meaningful, but it also means that 57% of future returns depend on factors CAPE doesn't capture.

This is where the data becomes striking.

You've probably heard this one: "If you miss just the 10 best days in the market, your returns get devastated."

Over the past 20 years, investors who stayed fully invested earned 58% more than those who missed just the five best-performing days in the market.⁴

Read that again. Missing just five days out of more than 5,000 trading days cost investors well over half their returns.

Here's what makes this particularly cruel: those best days often happen during volatile periods or right after sharp declines—exactly when your instincts are screaming at you to stay away.

Since 1988, missing the five best days would have reduced your long-term gains by 37%.⁵

And here's the kicker: you don't know which days those will be.

The statistic is real. Sounds terrifying, right? Like you should never, ever leave the market?

Here's what that argument conveniently leaves out.

Cliff Asness, founder of AQR Capital Management, published a paper in 1999 (which held up perfectly over the next 25 years), pointing out something obvious that the financial industry ignores: the "missing best days" argument is completely one-sided.⁶

If missing the best 12 months over 27 years destroyed your returns, missing the worst 12 months increased them by almost the same amount, actually slightly more.

His conclusion? "If you time the market and all you ever do is sell everything on precisely the best days in market history, that would be bad. Put this way, it is clear that this is an obvious and one-sided statement."⁷

The analysis assumes you have pathologically terrible timing - that you somehow only exit on the absolute best days and never exit on bad days. That's not how anyone actually invests.

Here's what really matters: the best and worst days don't happen randomly throughout calm markets. They cluster together during volatile periods.

Seven out of the 10 best days in the past two decades occurred during bear markets.⁸ The best days often come right after the worst days - sometimes the very next day.⁹

One study found that the market's best and worst months tend to be "directly adjacent in time" during market crises.¹⁰ As one analyst put it, "The worst and best market days are just like rain and rainbows. Generally, a rainbow appears only after a thunderstorm."¹¹

So here's the real question: If you're trying to avoid the storm, how do you ensure you're back in time for the rainbow that immediately follows?

You probably can't.

None of this is an argument that you should try to time markets. It's an argument that the popular "don't miss the best days" statistic - while technically true - presents an unrealistic scenario.

Real investors don't make binary all-in, all-out bets on single days. And if they did try timing, they'd probably miss some good days and some bad days.

When Schwab studied different investor behaviors over 20 years, they found something revealing:¹²

Even terrible timing beats perfect waiting.

I know what you're thinking: "Are you saying I should just ignore valuations and do nothing?"

Not quite. Here's what actually makes sense - and here's where we get to what really matters.

Your Portfolio Exists to Achieve Your Goals—Not to Avoid Downturns

This is the most important thing I'll say: your portfolio's job is not to maximize returns. It's not to avoid losses. It's not to outperform your neighbour or beat some benchmark.

Your portfolio exists to get you to your specific financial goals with an acceptable level of risk for your timeline and circumstances.

That's it. That's the only job.

A 35-year-old saving for retirement in 30 years should have a completely different response to today's valuations than a 64-year-old retiring next year. Not because one is smarter or more risk-tolerant, but because they have different goals and different timeframes.

The Questions That Actually Matter

Instead of "Are markets overvalued?" ask yourself:

1. Does my current asset allocation still match my timeline?

2. Am I taking more risk than I need to reach my goals?

3. When was the last time I rebalanced?

4. Do I have adequate liquidity for near-term needs?

Be Honest About Expected Returns

If there's one adjustment to make in light of current valuations, it's this: lower your return expectations for the next decade.

Historical CAPE levels like today's have been followed by below-average returns. That doesn't mean negative returns or that you should sell everything. It means:

Being realistic about future returns is different from predicting the next correction.

Here's what keeps me up at night as a financial advisor - and it's not high valuations.

It's investors who:

I've watched this pattern destroy more wealth than any market crash ever has.

Since 1926, investors who held stocks for five years had positive returns 87% of the time.¹³ The biggest risk isn't staying invested during expensive markets. It's abandoning your plan when things get uncomfortable.

Markets feel uncomfortable right now. That's normal. They often do.

But feeling uncomfortable and needing to act are two different things.

Your portfolio should be designed for your life, not designed for the market. If your current allocation makes sense for your goals and timeline, stay the course. If it doesn't - if you've drifted off course or your circumstances have changed—adjust it.

But adjust it to match your situation, not because of market predictions or valuation concerns.

The investors who have historically built lasting wealth aren't the ones who successfully dodged every correction. They're the ones who:

A portfolio isn't optimized when it avoids every downturn or captures every rally. It's optimized when it reliably gets you to your goals while letting you sleep at night along the way.

That's not sexy. It won't make for interesting cocktail party conversation. But it's what actually works.

If you're wondering whether your portfolio is properly positioned for your goals - not for avoiding the next correction, but for reaching your actual destination - let's talk. Not about market predictions or tactical timing, but about whether your current strategy still matches where you're headed and when you need to get there.

Because that's the only question that really matters.