How I Stay Invested When the Market Looks Overvalued

I have been investing in ETFs and stocks since 2015 and manage my portfolio myself. I live off the capital growth and dividends, so it is important for me to be mentally prepared for a recession. That is why I have studied more than 20 investment books in the last 10 years.

Stock market valuations are at an all-time high right now. Warren Buffett is holding record-high cash reserves. Many top investors argue that the market is at a record high, and some predict a crash soon. No one really knows when, or if, a crash is coming — so what should you do?

I set myself a stock allocation target of 50–60%. My stock portion consists mainly of an MSCI World ETF, an MSCI Emerging Markets ETF, and some blue-chip companies. The recent growth of the stock market has pushed my holdings above my limits.

I remember the sentiment during the 2009 crash very well, but I was not invested at that time. I was building a company from zero, so every bit of growth felt new to me, and I had no stocks or ETFs. I also lived through Covid and the 2022 downturn, but both were short-lived. I am fortunate that I stayed the course and did not sell.

My biggest lesson from The Intelligent Investor is that it is very hard to stay the course when you have not experienced a recession that lasted many years, or even decades. That is why I set a comfortable stock percentage.

These tips help me feel okay about a possible recession:

• Re-reading some of my favorite investment books. When I am unsure and too much noise is bothering me, I grab one of my favorite books and read it again.

• Journaling my thoughts and putting my fears on paper. I write down my fears and thoughts so I can come back to them later.

• Using ChatGPT to run simulations of recession scenarios based on my current holdings. This has been the biggest help for me. I let ChatGPT do the math for various outcomes, including what would happen if I reduced my stock positions now. I don’t let it make the decision — I use it to work through the possibilities.

My conclusion is that I would survive the worst-case scenarios, and reducing now would trigger taxes. So I decided not to reduce my positions and to stay the course.

Helpful prompt

Act as an investment committee including Warren Buffett, Ray Dalio, Howard Marks, John Bogle, and Morgan Housel. Stress-test my portfolio using historical evidence and scenario simulations — not predictions. Simulate crashes of -20%, -35%, -50%, and -65%. For each, briefly cover:

• Historical frequency and examples

• Main causes

• Approximate years of gains erased

• Recovery time

• Performance of stocks, bonds, cash, and gold

• Likely actions of disciplined long-term investors

• Scenario simulations: portfolio drawdown paths, rebalancing effects, and sequence-of-returns risk

• Tax implications (for simulation comparison only): evaluate the differences between reducing the current portfolio now versus not reducing it, focusing on realized gains/losses, timing of taxation, and effects across taxable and tax-advantaged accounts

Conclude with key lessons and the most resilient long-term portfolio strategy based on history.

My favorite books

• The Intelligent Investor — Benjamin Graham / Jason Zweig

• The Psychology of Money — Morgan Housel

• The Most Important Thing — Howard Marks

• Antifragile — Nassim Taleb

• The Little Book of Common Sense Investing — John C. Bogle

Happy investing!