The stock market isn’t a bargain anymore. Some investors might think it’s time to bet on a decline.
The price-to-earnings ratio on the Standard & Poor’s 500 hit 20 this week based on operating earnings, says S&P Dow Jones Indices. That’s above the 18.8 valuation average since 1988. Some individual stocks have pushed the valuation envelope to impressive extremes. Online retailer Amazon.com has seen its valuation soar to 940 times its diluted earnings over the past 12 months.
There are countless ways to bet the market party will come to an unfortunate end. Most brokers let you “short” individual stocks or market indexes. You buy the shares from someone else, sell the shares and then wait to buy them back at lower prices and return them. You can also purchase stock options giving you the right to require other investors to buy shares at higher prices after they fall. There are also exchange-traded funds that increase in value when the stock market falls.
But betting on a drop is a bad idea for most long-term investors. Stocks, on average, rise about 10% a year. Getting the timing right on bearish bets is infamously difficult. Mistakes on bearish calls can be costly if the stocks rise. Most long-term investors are best served picking a long-term portfolio and sticking with it.
USA TODAY markets reporter Matt Krantz answers a different reader question every weekday. To submit a question, e-mail Matt at firstname.lastname@example.org or on Twitter @mattkrantz.