Five Signs It’s Time to Reduce Equity Exposure

Is it time to reduce your equity holdings? I suspect it is for the vast majority of investors. That’s not to say I have a clue of how stocks will perform next week or even next year. I don’t. It’s because I believe that investing involves discipline. Here are five warning signs that it’s time to dial back on equities.

Your Portfolio Is Likely Out of Balance

I’m a believer in setting an asset allocation target and sticking to it. That means reducing stocks when they have been hot and buying more when they turn cold. There is ample evidence that most investors do just the opposite: They get greedy and buy high, then panic and sell low. Because stocks have been surging since 2023, if you haven’t rebalanced back to your target, you are likely way out of whack and aggressively invested. 

Metrics Show Stocks Are Richly Valued by Historical Standards

Perhaps the most widely known valuation to predict the stock market is the S&P 500 Cyclically Adjusted Price-Earnings Ratio, which is calculated by dividing the current price of the S&P 500 by the 10-year moving average of its inflation-adjusted earnings. It was developed by Nobel Prize-winning economist Robert Shiller in 1988. The measure is nearing an all-time high, approaching the dot-com bubble of 2000. Other valuation methods, such as trailing PE, show similarly high valuations. And even firms like Vanguard are forecasting lower expected future equity returns. Admittedly, all of these metrics to predict future returns are based on history and back tested. They do a much better job of predicting the past than the future. Nonetheless, it is a warning sign.

Security Firms Show Investors Have Taken Out Record Margin Debt

Debit balances in customers’ securities margin accounts are at record levels, rising from $1 trillion in June of 2025 to $1.5 trillion in June of 2026, according to FINRA. Investors borrow when they are brave in up markets but may panic and sell as the margins get closer to being called. Even if they don’t panic, automated mass sales as margins are called could cause stocks to fall even further. 

I’m Hearing Statements Like “Bonds Are for Cowards” 

I’m also hearing people say things like “I want to be 100% in stocks,” or “VTI and chill,” referring to the Vanguard Morningstar Total Stock Market ETF. This means all one needs to do is put every penny of investments into a single fund and then be confident it will grow just like it has in the past. The two problems with that assumption are: First, it may not; and second, I’ve found those are the same people I’m trying to talk off the ledge when they are ready to panic and sell. Let me be clear, I hear these brave statements only when stocks are near an all-time high. I never hear them during a bear market. 

People Tell Me “Stocks Have Done OK Lately.” Recency bias is real. We tend to give far more weighting to the recent past and forget about the 16 years ending in 1982 when stocks had a negative real return. From 2023 through Aug. 21, 2026, the stock market gained 107.4%, or 22.2% annually, as measured by the total return (dividends reinvested) of VTI. That’s more than twice the long-run average return of the stock market over the past century. Stocks have done far better than “OK.” But we tend to get used to things very quickly, so we expect those recent returns to continue. They won’t. 

Nobody knows the future of the stock market. However, we do know a few things:

• Disciplined investing works better than performance-chasing.
• Dying as the richest person in the graveyard is not the best goal.
• We get far more pain from losing money than pleasure from making the same amount of money (prospect theory).

So the stellar stock market performance since 2023 likely means we are closer to our financial goals than we were a few years ago. Financial author and theorist William Bernstein has said, “When you’ve won the game, quit playing.” This doesn’t mean get out of stocks completely, but rather, consider dialing back risky assets like stocks.

It’s been a phenomenal decade for stocks and a relatively awful decade for bonds. In fact, 2022 was the worst year ever for bonds, as interest rates surged. I argue that was a good thing. Real inflation-adjusted rates surged and, as of Aug. 21, 2026, Treasury Inflation-Protected Securities (TIPS) now yield as much as inflation plus 3%. One is guaranteed to get that real return if held until maturity. There is safety in high-quality bonds, especially with TIPS that generate a guaranteed real return. Though not as exciting as stocks, they will help us sleep better at night.

When stocks plunge (at some point, they will), all investors will feel excruciating pain. And I’ll be writing an article entitled something like “Stocks Are on Sale. Why Are So Few Buying?” My advice is to stick to a disciplined approach to investing.