If you’ve been obsessing over the issue of whether stocks are overvalued or not, Jason Zweig says you’re asking the wrong question.
In a recent piece for The Wall Street Journal, Zweig says the real question is “how much can I stand to lose before I bail out”? Why? “Because even if your assessment of market valuations is perfectly accurate, that won’t do you any good if you lack the financial or psychological fortitude to follow through.” Zweig says to use past losses for stocks or any other asset as a gauge for what future losses could be. For example, he says U.S. stocks fell 51% from late 2007 through the end of the bear market so investors should consider that such a decline could hit again before investing.
“None of this means you shouldn’t own stocks — or any other asset,” Zweig says. “It just means your have to think more honestly about what you are getting yourself in for.” By doing so, you can help avoid the fate of so many investors who bail after declines hit, locking in what should have been only temporary losses.