👉 How To Preserve Wealth in an Overheated Market: What You Need To Watch Out For 🥵

👉 Rebalancing Your Portfolio for Wealth Preservation: How To Do It The Right Way ✅

👉 Learn How To Value Stocks: Everyone Knows The Price, Not Everyone Knows The Value 💰

Welcome to this weeks edition of The Profit Zone.

As I write this, the S&P 500 is up almost 13% YTD, however that price action doesn’t tell the full story.

Beneath the surface lies a critical reality: the market is overvalued by historical standards.

Today, we’ll be unpacking how to invest during bull markets, key pitfalls to avoid, effective strategies and ways to preserve your wealth if the tide turns.

Before we get into why the market is overvalued, I think the below chart is important.

As you can see, U.S. shares have steadily increased since 1900, however if you look closely, you’ll realize that there’s ALWAYS a reason to sell.

Whether that be because of war, recessions, or pandemics, the journey to this point has been a bumpy one, but it all looks smoother once you zoom out.

The Shiller CAPE ratio, also known as the cyclically adjusted price-to-earnings ratio, is a stock market valuation tool that compares the current stock price to the average inflation-adjusted earnings from the last 10 years.

As of today, we sit on the high range as far as CAPE ratios go.

The below chart may seem confusing, but the one thing you should take from it is that the market is heading in a direction not seen since the dot com crash of 2000, when the CAPE ratio rose above 45.

The S&P 500's CAPE ratio stands at approximately 39.5 as I write this, higher than whats shown on the chart above and significantly higher than the 10 year average of 17 and 20 year average of 28.

This overvaluation stems from several important factors.

1) The post-pandemic recovery which was fueled by massive fiscal stimulus and low interest rates, which propelled tech-heavy indices to all time highs.

2) AI enthusiasm which has driven valuations in sectors like semiconductors and software sky high, reminding us of the dot com bubble.

3) Persistent inflation and rate cuts that came “slower than expected” by the Fed have also kept multiples elevated, as investors continue to chase growth in a low-yield environment.

The Buffett Indicator, which measures market cap to GDP, is also in dangerous territory signalling broad overpricing as of June 30, 2025.

While bull market like these can continue, these levels historically precede lower future returns that are often in the single digits or even negative.

In a bull market, the key is to participate without overexposing yourself.

How do you do this? Simple.

Focus on companies with strong balance sheets, consistent earnings growth and competitive moats.

Sectors like technology and in some ways, healthcare, have led that charge, but its important to be diversifying across other sectors and types of assets, which may offer better entry points during this growth frenzy.

Strategies to employ include:

Bull markets have a tendency to breed complacency.

It’s important to beware of market euphoria, where FOMO drives irrational buying and even selling.

Watch out for signs of a bubble, which can typically be identified through excessive speculation in meme stocks, IPOs that are skyrocketing or unprofitable companies trading at astronomical multiples, which we’ve seen time and time again.

Economic indicators like rising unemployment or inverted yield curves could also signal a downturn.

To gain a margin of safety, its important to think carefully about how your portfolio is allocated.

Maintaining 5-10% in cash for opportunistic buying during dips is not a bad idea and should be considered during markets like these.

You can also consider allocating capital to bonds which act as an income buffer.

Finally, diversifying with gold or real estate could be a good hedge against inflation.

Rebalancing is crucial for maintaining risk levels.

Set a target allocation based on your age and risk tolerance.

Wealth Preservation Portfolio: aim for 50-60% stocks, 30-40% bonds, and 10% alternatives.

Review quarterly: If stocks rise to 70% due to the bull run, sell some to buy bonds, restoring balance.

This helps you sell high and buy low, as bonds typically have a negative correlation to the stock market.

For example:

This strategy prevents emotional decisions and ensures you're positioned for downturns.

Remember, the best investors prepare for rain during sunshine.

Alex (The Dividend Dominator)
Founder and CEO of Dividend Domination Inc.
Follow me on Twitter, Instagram and LinkedIn

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