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Six charts that show why this market is overvalued

By Chris Rees

For the Covestor TenStocks portfolio, 2013 will remembered as the year of the Aveo Pharmaceuticals (AVEO) investment.

The S&P 500 Index (SPX) closed 2013 up around 32%—its best year since 1997—and the MSCI World Index finished up 24%. My portfolio, on the other hand, only managed to finish the year down 1.9% for the year. In my opinion, this awful under-performance relative to the market was almost totally due to my failed Aveo investment.

Running a concentrated portfolio means I can get a lot of price volatility. And it's not always pleasant price volatility. On a year to year basis, the ride can get very bumpy.

That's why I believe my work needs to be averaged over a five-year time frame. Five years helps even out the annual lumps and, in my opinion, gives a clearer and more dependable picture of how I am doing.

However, the Covestor Tenstocks portfolio does not have a five year track record yet. Since inception on May 19, 2010, its annualized return has been, well, close to zero, and it has significantly underperformed the market.

I've been investing successfully for over two decades, and I've been through bad patches before. The worst period for me was in the late nineties when I lost money for three consecutive years. It wasn't fun, but I got through it to enjoy substantially better times.

With 2013 behind us, I now need to look forward. I need a good 2014. So, let's look ahead.

On a macro level, I view the market as overvalued. Total market capitalization to GDP is currently around 120 percent. The average market cap-to-GDP ratio over the last 80 years is around 60. History suggests that a buyer of the market at these levels can expect forward annual returns of around 2%.

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AAPL $94.02 0.00%
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Chart of I:DJI
DOW 16,204.97 -211.61 -1.29%
S&P 500 1,880.05 -35.40 -1.85%
NASDAQ 4,363.1440 -146.4150 -3.25%

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