It’s easy to think the stock market is overvalued. There are so many measures that point in that direction.

The simplest one is the Cyclically Adjusted PE Ratio (CAPE Ratio). It’s the price to earnings ratio for the S&P 500 and right now it’s over 40. The mean ratio is a bit over 17 and the max it’s ever been, December 1999, was 44.19.

The CAPE is a useful measure for determining if the market is overvalued but the market can remain overvalued for a long time. It’s been over the average since 2009, when it dipped under during the Great Recession.

Also, remember that there is always a reason to sell and the media needs flashy headlines to keep people reading. So, you will read a lot of “AI is a bubble” and “a recession is around the corner” all the time. That’s not to say it’s not true this time, but a broken clock is right twice a day.

But if you’re concerned that the stock market is overvalued and you’re anxious to do something, what can you do that’s both responsible and rational?

Take a Breath

If you’re feeling anxious about the market, let me share a few statistics that should help:

1. As I mentioned earlier, the S&P 500 CAPE Ratio has been high for 16 years. It’s been “overvalued” for 16 years, even through all the gains and drops.
2. Corrections happen often. Every 3-5 years, there’s a bear market in the S&P 500. (20% drop)
3. Some of the best days in the stock market are during bear markets.

The point is this – don’t try to time the market. You can’t predict the top.

Yes, it will go down but then it will go back up.

As long as you don’t need the money in the meanwhile, you’ll be OK.

Review Your Financial Plan

If you haven’t reviewed and updated your financial plan recently, now is a good time.

If you don’t have a financial plan, now is a good time to build one and you don’t even need a financial planner. Here’s guide to building a financial plan without a financial planner.

It’s important to update your plan whenever you have major life events, such as when you get married, have kids, buy a house, etc. But there will be periods in your life when there are no major events. In those cases, you want to review your plan every year.

And remember to review the time horizons of all your accounts. Anything you don’t need for ten years won’t likely be affected by today’s market valuations. Anything cash you need within the next three years shouldn’t be in the stock market, they should be in safe investments like CDs, like these:

If you’re concerned about the state of the markets, use this time to update your financial plan. It can inform what you do next.

Reassess Your Emergency Fund

The stock market may be roaring but your personal financial situation may be different. It may be a good time to reassess your emergency fund and see if it’s something you wish to bulk up.

If so, it would be prudent for you to consider boosting it up at a time when the market is up so that your fund will meet your needs in the future.

In normal times, you may be comfortable with a 3-6 month emergency fund. If you are in a more tenuous job situation, you may wish to have one that’s 6-12 months of expenses. Only you know your situation and the likely future scenarios, so adjust it accordingly.

If you sell assets with gains, set aside some cash for taxes. In an ideal world, you could try to find assets with losses to offset the gains so it’s a tax neutral event.

Rebalance Your Portfolio

In your financial plan, you’ll have established an asset allocation for your investments. As a basic level, this allocation is a percentage of stocks and bonds that will help you achieve your goals.

The S&P 500 is up over 16% year-to-date and Vanguard’s Total Bond Market Index (BND) is up just 3%, there’s a good chance your allocation is no longer matching your targets.

You should rebalance your portfolio once a year or whenever your allocations are over 5% outside of your targets. If you started the year with a 90% stock, 10% bond portfolio, you’re now 91% stocks and 9% bonds (assuming 1% and 3% returns). You don’t trigger the percentage threshold but you can still adjust.

There are two ways you can do this.

1. You can sell what is above your target (stocks) and buy what is below your target (bonds).
2. Allocation future contributions to the asset below targets until it’s back in line.

The first way will likely trigger tax consequences, so the second way is preferred if you can do it.

Either way, if you’re concerned about the stock market being overvalued, putting more into bonds will adjust your allocation back to your targets and assuage your fears about investing into an overvalued market.

Make Charitable Donations

You can donate appreciated stock and it’s a big tax benefit.

When you donate appreciated stock, you get to claim the market value as a tax deduction if you itemize your deductions. It’s way better than selling the stock and donating the proceeds, since you’ll have to pay capital gains tax on the appreciated amount.

If you don’t want to donate appreciate stock to a specific charity right now, you can always donate it to a donor advised fund. Then, over a period of time, you can have the fund make donations on your behalf. You get the deduction immediately, you pay no capital gains, and can dole out the donations over several years.

Finally, if you have some losses in your portfolio, now would be a good time to take advantage of tax loss harvesting.

Do Less, Not More

The best investment portfolios are the ones that don’t get messed with. Our brains work in a fight or flight mentality, both of which demand action.

With investing, inaction can often be the best approach. Review your plan, adjust your assets if necessary, and make sure you’re protected with a funded emergency fund. Cash you need in the next three years should be in cash or other safe investments and turn off the news.