High valuations are not necessarily a sign of a market downturn, said Peter Mallouk, president and chief investment officer at Creative Planning in Leawood, Kansas, which has more than $18 billion in assets under management.
"While U.S. stocks are slightly above historical averages, we see tremendous bargains overseas," Mallouk said. He recommends that investors have a portfolio that is diversified globally to take advantage of value wherever it may be.
Interest rates were much higher during the dot-com bubble, and given the low-rate environment, stock valuation may not be the best reference point to determine if the stock market is overvalued, Newfound Research's Hoffstein said.
"Determining fair value is a tricky proposition, as structurally higher valuations can be justified by lower discount rates or increased expectations in earnings growth rates," Hoffstein said. "One signal we might look for is an earnings-yield level significantly below the 10-year U.S. Treasury rate, indicating that investors are forgoing the guaranteed Treasury return for a lower, and speculative, equity return."
Nevertheless, most advisors agree that cash would be the worst place for long-term investors to park their money in response to high stock valuations.
"Maintaining large amounts of cash on the sidelines for a significant period of time can lead to a dramatic loss in real purchasing power," Hoffstein said.