(MONEY Magazine) – We first warned readers more than a year ago that stocks were flying too high. Since then, we've advised you to follow a defensive strategy to guard against a possible 15% to 20% plunge in share prices. For example, last month, after analyzing the earnings of the 30 blue chips in the Dow Jones industrial average, we concluded that the Dow could decline to below 5500 this year. That's a drop of 20% from today's level.

Nonetheless, stocks have climbed to extraordinary heights. As a result, several readers have written to ask whether we have changed our minds, and if not, what they should do now. Here are our answers and the investing strategies we recommend to stay on track for double-digit annual returns over the next five to 10 years:

--We still think stocks are overpriced. So does Federal Reserve chairman Alan Greenspan, who told the Senate Banking Committee in late February that "caution seems especially warranted with regard to the sharp rise in equity prices." Greenspan's repeated references to high stock prices are a sign he's thinking about raising interest rates to cool speculation--most likely by one-quarter of a percentage point in March or April.

Greenspan first warned that stocks were becoming overvalued in December, when the Dow was at 6437. To return to that level, the index would have to fall 6%. As the chart at right shows, other benchmarks predict bigger possible declines. For instance, if shares dropped to historically average levels relative to companies' earnings, the market would sink 38%. So watch out below!

--The stock market has not entered a gravity-defying era. There's a theory circulating known as the "New Era" concept: The outlook for stocks is so good that traditional benchmarks no longer apply. Don't believe it. Even when you analyze stocks during favorable periods of low inflation, today's prices are 30% too high.

--Overpriced markets don't always crash. Sometimes they drift sideways until corporate profits increase enough to support high share prices. That could happen during the next two years, if--and it's a big IF--the economy stays healthy.

--It pays to be value-conscious. Historically, when average price-to-earnings ratios are above 17--as they are now--stocks typically deliver less than 8% a year. To earn double digits today, you'll have to focus on only the best values, favoring shares with P/Es below 22 and yields above 2%. Three examples: Chase Manhattan, General Dynamics and Union Pacific.

--Smart defensive investing can boost returns and limit losses. The way to maximize your wealth in the long run is to buy solid stocks, curb investing costs and minimize taxes. Essentially, that means picking shares with above-average growth prospects and holding them for at least five years. You may also want to toss in a few special situations, such as the six discussed in the story on page 106.

In addition, when you sell winning stocks nowadays, don't rush to reinvest your money. Building up cash reserves to as much as 25% of your portfolio will ensure that you have money to buy bargains when the market inevitably falls.

ALL DATA AS OF FEB. 28

Wall Street editor Michael Sivy is a chartered financial analyst and a former Wall Street research director.