Only a few more sleeps to Xmas. As a child, anticipation of the big day was generally one of my childhood highlights. For we knew what was coming. Presents.

As we end 2024, I am still awaiting, perhaps not with so much anticipation and excitement for my presents.

But as an investor, my expected presents are not entirely good news. With crazy expensive markets, my presents are the arrival of mean reversion. It is the kind of present no-one really wants but expects. Think socks for your father.   

Unlike counting down the days to Xmas, I can’t exactly pinpoint when mean reversion kicks in.

Unlike Santa’s arrival, mean reversion generally begins with a whimper not a bang. That’s because a study of markets shows that we cannot accurately pinpoint what event it is that will kick it off. We can only use hindsight (and plenty do) to determine when the decline started. Not past tense. 

Of course, this is not exactly helpful in helping us manage our portfolios with any sense of timing.

But it is important to place the here and now is. A broader perspective. When markets are rising or falling quickly, we tend to stay fixated on the short term as daily news arrives to either stoke our fear or greed.

However, it is always important to maintain a focus on the right timeframe. Most of us invest for the long term so it is not at all possible to pick the exact top or bottom of the market.

Unlike Xmas which comes at the same time every year, market declines are much less predictable but can be a lot more damaging once the decline starts. When markets are signalling overvaluation as they are at the moment, there is no way of telling exactly when it declines, but it is more important to understand your risk of large losses.

We end 2024 with what is arguably the most expensive US market in history. I suspect we are in the melt up phase which is the last burst before the inevitable reversion. Of course, I cannot be sure and that is what risk is all about. But over time, I have learnt not to overstay my welcome.

After a 15 year bull market which has delivered around a 450% return, it may well be time to review and rebalance any stocks listed in the US market. When investors panic, they sell everything and don’t bother choosing with any discretion.

Our long term indicator CAPE has gone from a low of approximately 14 to a now sky high 39 and there is a myriad of other indicators screaming expensive.

What you see in markets today are rare events that can substantially impact your previous wonderful returns.

It’s time to be extremely cautious.