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.

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.