Editor's note: Don't let this painful market ruin your retirement... Skyrocketing prices and rampant volatility led investors to a mass exodus this year as many folks scrambled for the safest place to park their money – the sidelines. While some investors may think that the storm clouds have passed, the reality is this uncertain market could drag on for much longer... That's why Extreme Value editor Dan Ferris says it's crucial for investors to realize that putting your money to work in today's chaotic market presents a massive risk. In today's Masters Series, adapted from the June 2021 issue of Extreme Value, Dan explains why volatility could continue to fill up the market for much longer... details why the current market will go down as one of the highest-risk environments of all time... and shares what you must do in order to prepare for this ongoing chaos...
Warning: Prepare for Extreme Volatility By Dan Ferris, editor, Extreme Value Most of the time, it doesn't matter if the stock market seems a little bit overvalued or undervalued. Most of the time, it's better to ignore that and focus on finding good and great businesses so you can invest your hard-earned capital for the long term. Most of the time. But there are two times when you should think about the overall market... One is when the market reaches extreme lows in valuation and sentiment. That tends to happen near the bottom of bear markets and big corrections. Risk is lower at those times, and return prospects are higher. That's where we were after the massive COVID-19 sell-off in March 2020. The other time you should be aware of the overall stock market is when it reaches extreme highs of valuation and sentiment. That's where we are today. Right now, we're in the midst of a bear market. And it's time to position your portfolio accordingly. Before we continue, let's get one thing straight... This is not fearmongering. In short, we'll do a lot better over the long term if we get a few big corrections and even bear markets every now and then. So today, let's take a close look at a few valuation metrics that signal we're in a high-risk environment right now... The first and simplest metric signaling higher risk in stocks today is the S&P 500 Index's price-to-sales (P/S) ratio. Historically, this ratio has been highly negatively correlated with subsequent 10- and 12-year average annual returns. That means that when the ratio has been high, stocks have tended to perform poorly afterward. When it has been low, stocks have tended to perform well afterward. Within the past few years, the P/S ratio has peaked twice just months before a large correction. As you can see in the following chart, it peaked around 2.34 in January 2018 (its highest level since the dot-com high in March 2000). The S&P 500 then fell nearly 20% starting in late September, bottoming on Christmas Eve. In January 2020, the P/S ratio peaked again at 2.30. One month later, the S&P 500 began its pandemic-induced tumble, closing down 34% by mid-March. The P/S ratio hit a new all-time high of 3.2 in late December 2021. 
The second important valuation tool for the overall stock market is the ratio of total market cap to gross domestic product ("GDP"). This metric gained in popularity after the "father of value investing" Ben Graham taught it to his star pupil, Warren Buffett... At the top of the housing bubble in June 2007, the indicator stood around 1.06. At the top of the dot-com mania in March 1999 – until recently, the single-most-expensive moment in U.S. stock market history – it was at 1.5. Today, it's still near that level. So either these metrics are broken, or right now is simply one of the single-riskiest moments in stock market history. Good investing, Dan Ferris
Editor's note: Investors have experienced a great deal of pain this year. But Dan says an investing event is about to unfold that could mean the difference between solid returns or a complete wipeout of your savings... That's why he recently hosted a presentation where he shared the one step that could save your portfolio. But if you don't take action right now, Dan says the losses will be devastating. Click here to watch the replay... | 
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