Buffett Indicator

[Keith123]

look at the attached chart.  only 3 times in recent history has the buffett indicator been this high.  the 2000 crash, the 2009 crash, and now.  i think the best case scenario is that the market trades sideways for years and years.  does anyone think the market is going to keep going up?  why?

[Livewell]

If you feel this is the top, and you want to market time, need the money soon, or are building your fallout shelter, then sell.

For answers as to why to stay in, read any number of threads.

My personal favorite is this one http://jlcollinsnh.com/2012/04/15/stocks-part-1-theres-a-major-market-crash-coming-and-dr-lo-cant-save-you/

[MustacheAndaHalf]

By that indicator, the market has been above average for 20 years.
http://www.advisorperspectives.com/dshort/updates/Market-Cap-to-GDP

What happens if you sell now, and never get an indicator to start buying?

[GrowingTheGreen]

You really think a simple chart is going to predict a massively complicated market?

Stop trying to time the market. That's what you're doing. Stop it.

[sol]

does anyone think the market is going to keep going up?  why?

Yes, I think the market is going to keep going up.  Because it always has, and I have no reason to believe that this time is any different from any other time.

Will there be periodic setbacks?  Sure, maybe even multi-year setbacks of the same sort we've seen many times before.  But in the long run?  As long as the American economy continues to function, then the stock market is going to keep going up.  And when the American economy ceases to function, I'll have bigger problems than my portfolio returns.

[YoungInvestor]

In an environment with no yield to speak of on treasuries and very low yields on bonds, of course stocks are going to get higher valuations.

Using a single metric without putting it in context with the broader environment is worthless.

[Keith123]

does anyone think the market is going to keep going up?  why?

Yes, I think the market is going to keep going up.  Because it always has, and I have no reason to believe that this time is any different from any other time.

Will there be periodic setbacks?  Sure, maybe even multi-year setbacks of the same sort we've seen many times before.  But in the long run?  As long as the American economy continues to function, then the stock market is going to keep going up.  And when the American economy ceases to function, I'll have bigger problems than my portfolio returns.

"In the 1990s, every dip in the stock market was hailed as a "buying opportunity," because the prevailing wisdom was that stocks always do well over the long haul.

And stocks usually do do well over the long haul, especially relative to bonds and cash. But there's one major exception to this: Stocks don't do well over the long haul when they're bought at extremely high prices.

When have we had extremely high prices for stocks?

Well, in the late 1920s, for example, just before the Great Crash and Great Depression. Stocks crashed nearly 80% and then moved sideways for more than two decades.  Note that it also took 18 years to recover from the malaise market of 1966-1982.

We also saw extremely high prices in Japan in the late 1980s. Stocks crashed there and are still falling nearly three decades later.

We had extremely high prices in the US in the late 1990s.

During all of those peak periods, stocks hit extreme prices relative to earnings. And in all of those periods so far, the "long run" required to do well if you bought stocks near the peak has been shockingly long." - http://www.businessinsider.com/stocks-for-the-long-run-dow-japan-2012-6

So yeah, the stock market always goes up.  But, if you buy really high (like right now), it could give you decades of poor returns. 

[Keith123]

By that indicator, the market has been above average for 20 years.
http://www.advisorperspectives.com/dshort/updates/Market-Cap-to-GDP

What happens if you sell now, and never get an indicator to start buying?

I wouldn't use this as a selling indicator ever.  Use it only as a buying indicator.  We really never know how high and crazy the market can get and for how long.  I'd hold what is already in the market through the ups and downs.  I just wouldn't buy when things are this frothy.  There have been buying opportunities using this indicator over the last 20 years (1996,2003, and 2009 both had windows when the ratio was around 75 to 80).  These were the best periods you could have bought during the last 20 years.  They would have given you incredible returns if you held through to today. If you bought during 2000 and held through to today, adjusted for inflation you would have returned nothing but dividends.  A 15 year return of 0%. Don't buy when the market it too high like it is now.  It will hurt your future returns tremendously.

[protostache]

Prices are not extremely high for almost all of the market. Let's look at Wal-Mart. In 1999, right before the dot-com bust, Wal-Mart's PE was 39. That's insane. They're a retailer. A good one, but just a retailer. In 2008, their PE was 16. Today, their PE is 14.s

That said, if you're investing in companies like Amazon or Facebook, and probably almost all of us are because they make up a huge portion of VTSAX and the S&P 500, then you're buying at extremely high valuations. Facebook is not intrinsically worth more than ExxonMobile. It makes no sense. Amazon has a PE of over 400 which is definitely in 1999 dot com bubble territory. They can say they're funding growth all they want, but I don't believe them. They're a retailer with an amazing technology platform.

(WMT historical data from http://www.rationalwalk.com/?p=896).

[money_bunny]

What is interesting to me is "Well what else are you going to do?" I've pondered this myself as I put in a about 22-24K in the last month as I do some housekeeping (Roth maxed out, 401K, HSA, etc.).

1. Spend it on fun/not very useful things? Not really my style. I did sign up for my local Trade School's welding class, and I want to take a green building workshop.
2. Savings account to max a bonus? Not a great idea. Chase will give me $200 dollars if I lock up 15K with them. Thanks but no thanks.
3. 25K in the NYC area for real estate does not get you that much.
4. Bonds, still need to learn about bonds. That is a hole in my knowledge base.
5. Lending Tree or similar? This may be an option.

[Keith123]

Prices are not extremely high for almost all of the market. Let's look at Wal-Mart. In 1999, right before the dot-com bust, Wal-Mart's PE was 39. That's insane. They're a retailer. A good one, but just a retailer. In 2008, their PE was 16. Today, their PE is 14.s

That said, if you're investing in companies like Amazon or Facebook, and probably almost all of us are because they make up a huge portion of VTSAX and the S&P 500, then you're buying at extremely high valuations. Facebook is not intrinsically worth more than ExxonMobile. It makes no sense. Amazon has a PE of over 400 which is definitely in 1999 dot com bubble territory. They can say they're funding growth all they want, but I don't believe them. They're a retailer with an amazing technology platform.

(WMT historical data from http://www.rationalwalk.com/?p=896).

I would have to disagree with you.  The p/e for the S&P right now is 21.  That is quite high for a mature economy with low GDP growth expectations.  A high p/e valuation suggests investors anticipate growth.  Walmart's p/e has dropped over time because as the company saturated the US and world with stores, less and less growth was expected.  The same will be true for Amazon once it's growth starts to stall.  Investors are expecting huge earnings growth from Amazon for the next few years (http://www.nasdaq.com/symbol/amzn/earnings-growth). 
 

[Keith123]

What is interesting to me is "Well what else are you going to do?" I've pondered this myself as I put in a about 22-24K in the last month as I do some housekeeping (Roth maxed out, 401K, HSA, etc.).

1. Spend it on fun/not very useful things? Not really my style. I did sign up for my local Trade School's welding class, and I want to take a green building workshop.
2. Savings account to max a bonus? Not a great idea. Chase will give me $200 dollars if I lock up 15K with them. Thanks but no thanks.
3. 25K in the NYC area for real estate does not get you that much.
4. Bonds, still need to learn about bonds. That is a hole in my knowledge base.
5. Lending Tree or similar? This may be an option.

Why not just hold the cash if you can't find an attractive way to put it to work?  If you view cash as an asset, it appreciates in value if the market goes down aka you can buy more shares.  Or...as I suggested in another thread, buy ETF's of beat up sectors within an over-valued market.  Check out VDE, Vanguard's energy sector ETF.  Seems like a good opportunity to me.  I bought quite a bit of it over the last week so my money is where my mouth is. 

[Seppia]

Please stop with this AHHHHHHH MARKET TIMING1111!1!1!1!1!1!!!!!1!!!1
Right now is a bad moment to be buying the USA total market, according to any long term metric you want to look at (Shiller P/E, Buffett indicator being two examples).
As others mentioned, statistically speaking if you are going all-in today you are to expect pretty mediocre returns.
Keeping money in the mattress isn't particularly smart, but Europe, an ETF tracking the energy sector or the emerging markets seem much better investments at this point in time.

[Manguy888]

I'd suggest anyone read The Signal and the Noise by Nate Silver, especially the chapters on the economy. It's been really eye opening.

Trained economists have never been able to forecast the short or long term direction of the stock market. They can't predict GDP or unemployment numbers with any kind of accuracy EVEN FOR THE PRESENT, let along the future (hence the revised statistics several months later).

Saying that "all economic indicators are saying XYZ" implies that economic indicators can historically predict anything, which they can't. And if they have in the past, that's no guarantee they will in the future.

The economy, business cycle, and world are constantly changing. The interconnectedness (or lack thereof) in the world in changing. Government policies are always changing. Because of this, the value of something like the schiller P/E, because it's measuring radically different economies over time, doesn't hold a lot of water in my opinion. To average out all those decades of data and saying "stock markets are overvalued!" to me makes no sense.

If we used the schiller p/e median to truly determine market valuations, then the market has been overvalued for 30 years. Should we really not have invested during that time? Or is that indicator less perfect than we think it is.

Pick an asset allocation you can handle, stick with it, and keep investing. If you can't handle the volatility, put more onto your mortgage (guaranteed return) or add more bonds

[Seppia]

What?

There is correlation between Shiller P/E and expected returns over a reasonably long period of time (10-15 years), people have done research on this.
Short term predictions are useless, but we wouldn't be on this forum if we cared about the short term.

[Keith123]

Please stop with this AHHHHHHH MARKET TIMING1111!1!1!1!1!1!!!!!1!!!1
Right now is a bad moment to be buying the USA total market, according to any long term metric you want to look at (Shiller P/E, Buffett indicator being two examples).
As others mentioned, statistically speaking if you are going all-in today you are to expect pretty mediocre returns.
Keeping money in the mattress isn't particularly smart, but Europe, an ETF tracking the energy sector or the emerging markets seem much better investments at this point in time.

Seppia,

Relax, it's not really market timing.  My whole strategy boils down to this:  Buy during under-valued periods, then hold forever.  Don't average into an over-valued market.  Never sell.

I'm not suggesting going in and out of the market.  Just wait for periods of under-valuation to start buying.  Accumulate cash during periods of over-valuation or buy under-valued sector ETFs within an over-valued overall market.  I've been buying VDE, Vanguard's energy ETF, in the current market as I feel it is under-valued.  We seem to be roughly on the same page.

[Kaspian]

While I'd never beleive a forecast, Jack Bogle thinks the markets are going to move sideways for about the next 4 years and I'm more apt to believe him than anyone else.  However, does your Investment Policy Statement say to do anything differently if that happens?  No?  Then keep on truckin'.

[Keith123]

If we used the schiller p/e median to truly determine market valuations, then the market has been overvalued for 30 years. Should we really not have invested during that time? Or is that indicator less perfect than we think it is.

The returns over the the past 30 years have been great.  No question about it.  But...we are looking at them from a peak.  What if things revert back to the mean, as they often do?  How will those returns look then?  Just because an over-valued market stays or gets more and more over-valued doesn't mean its a good place to invest.  We have been in an over-valued market for a little over 20 years I'd say with a few very brief periods where valuations were ripe for a buying opportunity (1995, 2003, and 2009).  Before that, we were in a 20 year under-valued market (1973 to about 1993).  I don't think you should expect over-valuation to be the norm from now on just because it's been that way for 20 years or so.  It wasn't the norm for the 20 years prior to that period. 

[Seppia]

Please stop with this AHHHHHHH MARKET TIMING1111!1!1!1!1!1!!!!!1!!!1
Right now is a bad moment to be buying the USA total market, according to any long term metric you want to look at (Shiller P/E, Buffett indicator being two examples).
As others mentioned, statistically speaking if you are going all-in today you are to expect pretty mediocre returns.
Keeping money in the mattress isn't particularly smart, but Europe, an ETF tracking the energy sector or the emerging markets seem much better investments at this point in time.

Seppia,

Relax, it's not really market timing.  My whole strategy boils down to this:  Buy during under-valued periods, then hold forever.  Don't average into an over-valued market.  Never sell.

I'm not suggesting going in and out of the market.  Just wait for periods of under-valuation to start buying.  Accumulate cash during periods of over-valuation or buy under-valued sector ETFs within an over-valued overall market.  I've been buying VDE, Vanguard's energy ETF, in the current market as I feel it is under-valued.  We seem to be roughly on the same page.

 I was actually supporting your point :)

[Eric]

My whole strategy boils down to this:  Buy during under-valued periods, then hold forever.  Don't average into an over-valued market.  Never sell.

The returns over the the past 30 years have been great.  No question about it.  But...we are looking at them from a peak.  What if things revert back to the mean, as they often do?  How will those returns look then?  Just because an over-valued market stays or gets more and more over-valued doesn't mean its a good place to invest.  We have been in an over-valued market for a little over 20 years I'd say with a few very brief periods where valuations were ripe for a buying opportunity (1995, 2003, and 2009).  Before that, we were in a 20 year under-valued market (1973 to about 1993).  I don't think you should expect over-valuation to be the norm from now on just because it's been that way for 20 years or so.  It wasn't the norm for the 20 years prior to that period.

There seems to be some disconnect here.  Either we're all misunderstanding your plan or it's not well thought out.  You're stating two things -- 1) Accumulate cash during an overvalued market and 2) The last 20 years have been overvalued.

When I read this, it makes me think that you would not have invested at all over the last 20 years.  While no one should expect "over-valuation" (dubious measurements aside) to be the norm for the next 20 years, it's entirely possible that it will be.  And then you'll have not invested, or invested very little, because the market was still continuously overvalued.

I mean, you're obviously free to do what you want.  It's your money.  But I can pretty much guarantee that you're going to kick yourself and be pretty pissed at the market-timing hubris that your younger self decided on if this strategy cause you to continue to sit on the sidelines.

[hoping2retire35]

death spiral is pretty strong language, mind you this is CITI not zerohedge.

http://www.cnbc.com/2016/02/05/citi-world-economy-trapped-in-death-spiral.html

[naners]

I like this analysis a lot: What if you only invested at market peaks over the last 30 odd years? TL;DR: You'd still do well provided you never sold and kept saving in between. But you'd have been better with DCA.

http://awealthofcommonsense.com/worlds-worst-market-timer/

And this post: What happened to the money you invested since 2001:

https://www.bogleheads.org/forum/viewtopic.php?f=10&t=182894

[Retire-Canada]

My whole strategy boils down to this:  Buy during under-valued periods, then hold forever.  Don't average into an over-valued market.  Never sell.

Never sell? Really?

In your other thread you talk about rebalancing between assets. Are you going to do that? If so how by selling investments or investing your free cash?

How do you decide how much cash to keep? Assuming you are saving and investing if there is always a sector ETF you see as undervalued then will you be 100% invested and hold no cash? If you will always be holding cash how much and how do you decide when is the "right" moment to invest it?

My main concern with your plan is that by avoiding the main stock markets and either holding a lot of cash or being heavily invested in specific sectors [ie. energy] you will be poorly diversified and have a lot of drag on your portfolio.

Any sector can do poorly for a long time and is at risk for a technology disruption.

Your cash is being eaten away by inflation waiting for that glorious moment when VTI tanks and you can invest it.

If you don't hold cash and you will never sell what do you do when VTI tanks and you have no "dry powder"?

Worth a read ---> http://awealthofcommonsense.com/worlds-worst-market-timer/ [same link Naners posted]

From link:

Lessons from Bob’s Journey:

If you are going to make investment mistakes, make sure you are biased towards optimism and not pessimism. Long-term thinking has been rewarded in the past and unless you think the world or innovation is coming to an end it should be rewarded in the future. As Winston Churchill once said, “I am an optimist.  It does not seem too much use being anything else.”

Losses are part of the deal when investing in stocks.  How you react to those losses is one of the biggest determinants of your investment performance.

Saving more, thinking long-term and allowing compound interest to work in your favor are your biggest accelerants for building wealth. These factors have nothing to do with picking stocks or a complex investment strategy. Get these big things right and any disciplined investment strategy should do the trick.

[Keith123]

Ok.  I'll admit I don't have a perfect plan and I may kick myself later.  I'm going to try and clarify a few things here though and explain my own personal situation so that maybe you understand my perspective. 

My situation:

32yrs old - roughly 600k investment portfolio.  Right now, 40k into the market, 110k cash, 450k tied up in short term (less than a year) hard money loans to real estate investors at 12%.  As the housing market has come back, there are less distressed properties for investors to grab and flip and for me to loan on.  This has been causing more and more cash to return to me lately as the investors sell the flips and can't find more deals .  I should have 200k cash in the near term with no more hard money lending prospects.  This is why I am in a bit of a jam.  It seems nuts to average into the market right now.  The only opportunity that I can see right now is the energy sector.   

Regarding my strategy:

When I say never sell, I mean whatever I have in the market will stay in the market.  If I've bought VTI, I will never sell it.  If, on the other hand, I am buying sector ETFs in an over-valued market like this one, I will reallocate to other sectors periodically.  For example, if I am holding the energy sector ETF right now and it climbs into an over-valued range, I would consider selling that ETF and buying a different, under-valued sector ETF with the proceeds.  If there isn't an under-valued sector, I stay put with what I have in the market and accumulate any cash I am able to save until a sector becomes under-valued and then use the cash to buy that sector.  If I am holding sector ETFs and the market as a whole becomes under-valued, I will sell the sector ETFs and buy VTI.  Basically re-balancing once or twice a year, but not going to cash. As I save, I will deploy new money in the same way.  It's just very hard for me to average a large cash position into this market without thinking I am hurting my future returns badly.  The only thing I can think of is averaging into the market for the next 10 years to smooth it out, which I really don't want to do.   

Seriously, what would any of you guys do?  I'm open to suggestions.   

[Kaspian]

Dude, I have *no* idea how you're going to figure out what's properly under-valued.  And messing around with commodity sectors is more like speculation (AKA "gambling") than investing properly.  Why the hell would you take the difficult path?  For an extra 1 or 2% more than you need for FIRE?  The majority of stats show that not only will you not be able to do that, but you won't meet the market benchmark.  So, why?  Why do it a difficult way that you're always guessing and juggling?  Seriously--if figuring out things which were "under-valued" was easy-peasy, none of us would bother with index investing and just buy undervalued company stocks directly all the time. 

[Keith123]

Dude, I have *no* idea how you're going to figure out what's properly under-valued.  And messing around with commodity sectors is more like speculation (AKA "gambling") than investing properly.  Why the hell would you take the difficult path?  For an extra 1 or 2% more than you need for FIRE?  The majority of stats show that not only will you not be able to do that, but you won't meet the market benchmark.  So, why?  Why do it a difficult way that you're always guessing and juggling?  Seriously--if figuring out things which were "under-valued" was easy-peasy, none of us would bother with index investing and just buy undervalued company stocks directly all the time.

Do you realize that if the s&p were to be valued near its historical averages, according to several measures like the buffett indicator and the shiller pe, it would have to fall by around 30% to 35% from where it is now?  And that's just for it to be back to it's average valuation.

I don't want to go the hard way. I would love if the market was fairly valued or under-valued.  I'd go all in and hold forever.  I'm not trying to squeeze an extra 1% or 2%.  I actually don't even like thinking about investments.  It's my dream to be fully invested in market index fund someday and to leave it there forever.  I just need a buying window to do it.  In the meantime, I think I have to do it the hard way until the total market comes back to normal levels.  I just truly believe that this is going to one of the worst times in modern history to get into the market.  Everyone's returns look great from the past because we are at a huge peak...even with the recent drops in the market.  How will returns look if the S&P returns to historical valuations and stays there?  Everyone will have had a 0% or negative return since 1997/1998 (adjusted for inflation and not including dividends). This 20 year period of over-valuation is not normal.  It will end, I just don't know when.  Only 2 times in the history of the stock market have valuations been this high - 2000 and 2007/2008.  Doesn't that scream over-valued and unsustainable to anyone else?  Maybe I'm doing the math wrong but that's how I see it. 

Just to top it all off by the way, corporate profit margins are at record highs.  Roughly 10% vs. 6.5% historical average.  That just goes to further the case that the market is over the top.  I don't think the world is going to end by any means, but where we are is simply not sustainable.  I wish I was optimistic enough to think that things will just keep going up forever, but history paints a much different picture.  Look at Japan.  Stock market peaked in 1990 and hasn't recovered since.  Don't think it can't happen here too.       

[Kaspian]

Well, I have no idea how you're going to figure it out your way.  When I look at a basic sector list:

Energy
Basic Materials
Industrials
Cyclical Goods & Services
Non-Cyclical Goods & Services   
Financials
Healthcare
Technology
Telecoms 
Utilities 

I just go, "Wow, what the fuck?"  I have no idea how to predict what's over/under in a list like that.  (And I would steer miles clear of any advisor who told me they did.)

Are you planning to analyze PE ratios for companies in those types of different areas when the time comes and you think you need to sell one you already own which you've determined is overvalued?  I have no idea.  Doesn't sound like a great "strategy"--at least not for the common investor.  I'd just put them on a dartboard and give a monkey a handful of darts for all the good it'd do.  (Yes, I wish I owned a monkey.)

[FIRE47]

Just gotta stay diversified - bonds, REITS, International, Gold if need be - it took me a few painful years but I'm finally where I want to be.

If you're 100% US stocks and that's all your looking at then of course you're asking for wild swings along with your long term returns and yes look vs other asset classes the US could be due for a thrashing, but when exactly and when will you get back in?

Look if you're too afraid of the stock market then just stay out - you seem to be doing pretty well for yourself - the main lesson I've learned is that you'll kill yourself sweating over this stuff, when to get in, what to get into, when to get out - it's not worth it - that's why Im scaling back my risk and letting a robo advisor take care of it.

[Keith123]

Well, I have no idea how you're going to figure it out your way.  When I look at a basic sector list:

Energy
Basic Materials
Industrials
Cyclical Goods & Services
Non-Cyclical Goods & Services   
Financials
Healthcare
Technology
Telecoms 
Utilities 

I just go, "Wow, what the fuck?"  I have no idea how to predict what's over/under in a list like that.  (And I would steer miles clear of any advisor who told me they did.)

Are you planning to analyze PE ratios for companies in those types of different areas when the time comes and you think you need to sell one you already own which you've determined is overvalued?  I have no idea.  Doesn't sound like a great "strategy"--at least not for the common investor.  I'd just put them on a dartboard and give a monkey a handful of darts for all the good it'd do.  (Yes, I wish I owned a monkey.)

I wish I owned a monkey too.  Ha! 

I plan on using the shiller pe for each sector of the S&P 500 to see which is undervalued.  Check it out - http://www.gurufocus.com/sector_shiller_pe.php.  I'm trying to find the historical average shiller pe for each of these sectors to use as as a benchmark also.  I'm sure each sector has a different historical valuation average.  However, since the overall shiller pe is 24 right now, I figure the energy sector (shiller pe of 11) is the best opportunity for safety in a declining market and out performance in a rising market. 

[protostache]

Dude, I have *no* idea how you're going to figure out what's properly under-valued.  And messing around with commodity sectors is more like speculation (AKA "gambling") than investing properly.  Why the hell would you take the difficult path?  For an extra 1 or 2% more than you need for FIRE?  The majority of stats show that not only will you not be able to do that, but you won't meet the market benchmark.  So, why?  Why do it a difficult way that you're always guessing and juggling?  Seriously--if figuring out things which were "under-valued" was easy-peasy, none of us would bother with index investing and just buy undervalued company stocks directly all the time.

Do you realize that if the s&p were to be valued near its historical averages, according to several measures like the buffett indicator and the shiller pe, it would have to fall by around 30% to 35% from where it is now?  And that's just for it to be back to it's average valuation.

I don't want to go the hard way. I would love if the market was fairly valued or under-valued.  I'd go all in and hold forever.  I'm not trying to squeeze an extra 1% or 2%.  I actually don't even like thinking about investments.  It's my dream to be fully invested in market index fund someday and to leave it there forever.  I just need a buying window to do it.  In the meantime, I think I have to do it the hard way until the total market comes back to normal levels.  I just truly believe that this is going to one of the worst times in modern history to get into the market.  Everyone's returns look great from the past because we are at a huge peak...even with the recent drops in the market.  How will returns look if the S&P returns to historical valuations and stays there?  Everyone will have had a 0% or negative return since 1997/1998 (adjusted for inflation and not including dividends). This 20 year period of over-valuation is not normal.  It will end, I just don't know when.  Only 2 times in the history of the stock market have valuations been this high - 2000 and 2007/2008.  Doesn't that scream over-valued and unsustainable to anyone else?  Maybe I'm doing the math wrong but that's how I see it. 

Just to top it all off by the way, corporate profit margins are at record highs.  Roughly 10% vs. 6.5% historical average.  That just goes to further the case that the market is over the top.  I don't think the world is going to end by any means, but where we are is simply not sustainable.  I wish I was optimistic enough to think that things will just keep going up forever, but history paints a much different picture.  Look at Japan.  Stock market peaked in 1990 and hasn't recovered since.  Don't think it can't happen here too.       

I feel like you're putting a lot of weight on PE when maybe that isn't necessarily warranted. Over the past few years we've seen earnings decrease for lots of weird accounting reasons that don't match up with reality. For example, Hershey's earnings have been artificially low for the past few quarters while they take a series of markdowns related to their operations in China. For another example, every large non-cyclical consumer producer I've looked at has had to take large markdowns for several years in a row because Venezuela keeps changing how their exchange rate works and companies have to keep rolling with the changes. Nestle's earnings are weird in USD because EURUSD, EURCHF, and USDCHF are all wacky lately. Earnings in constant currency are up and to the right, as expected.

The Shiller PE is another thing entirely. It's high because it looks at a 10 year period that is still including the massive losses in the financial sector in 2008 and 2009. Most other sectors made it through that period just fine, but the largest companies in the financial sector were so huge and got hit so hard that it's still reverberating in that figure. Take out AIG, Bear Stearns, and Lehman Brothers out of the calculations and it comes back to reality.

[sol]

I figure the energy sector (shiller pe of 11) is the best opportunity for safety in a declining market and out performance in a rising market.

Sure, except that there are real reasons why the "energy" aka carbon sector is down right now and is expected to decline even further.  Just looking at the CAPE ignores a lot of useful information about future return expectations.

Which highlights the whole efficient market reasoning for not trying to time the market.  Energy is down because there is an oversupply of oil.  The oversupply isn't going away any time soon, despite what the P/E is telling you.  I think it will recover eventually, but I have no faith it will outperform other market sectors over the next year or two.

[Keith123]

Just gotta stay diversified - bonds, REITS, International, Gold if need be - it took me a few painful years but I'm finally where I want to be.

If you're 100% US stocks and that's all your looking at then of course you're asking for wild swings along with your long term returns and yes look vs other asset classes the US could be due for a thrashing, but when exactly and when will you get back in?

Look if you're too afraid of the stock market then just stay out - you seem to be doing pretty well for yourself - the main lesson I've learned is that you'll kill yourself sweating over this stuff, when to get in, what to get into, when to get out - it's not worth it - that's why Im scaling back my risk and letting a robo advisor take care of it.

All I'm afraid of is getting into the market at one of the most overvalued times in history.  It's not like it's kinda sorta overvalued.  It's through the roof if you factor in corporate profit margins being at record highs.  If you look at history, periods when valuations are this high do not last for long.  The run up can take a while (5 to 10 years), but the fall is fast and hard (usually bottoming in 2 to 3 years from the peak).  I'm not waiting for the market to crater, it may never.  I'm waiting for it to be fairly priced.  Once it's fairly priced, I'll start averaging in.

[Retire-Canada]

Once it's fairly priced, I'll start averaging in.

What happens if it keeps rolling up for the next 10yrs and does not get to your expectation of "fairly priced"?

[Retire-Canada]

Ok.  I'll admit I don't have a perfect plan and I may kick myself later.

Seriously, what would any of you guys do?  I'm open to suggestions.

What would I do? I'd figure out a globally diverse AA that I like and invest my money in it now.

I don't have $200K to drop in at one shot though so if that bothers you do it slowly 10%/week or month to spread out the buying.

What I would not do myself is buy sector ETFs especially energy. There is no reason they have to return to higher values anytime soon. All it takes is one "extra" barrel of oil to keep that price down for a long long time. That could come about for all sorts of reasons: low demand, over supply, government regulations and tech disruptions. As other folks have said that amounts to speculation not investing. In fact I sold my energy sector ETF holdings [develop under old FA] in 2015 and moved that money into US, CDN and Int'l Index ETFs. This way I still hold lots of energy stocks, but I am well diversified.

Since you seem concerned both about your strategy and the "conventional" investing approach how about splitting that money into 2 pots? Invest 50% into VTI and 50% into sector ETFs that you think are under valued. That way whichever approach wins out you'll have a solid return from it.

[Jeremy E.]

does anyone think the market is going to keep going up?  why?

Yes, I think the market is going to keep going up.  Because it always has, and I have no reason to believe that this time is any different from any other time.

Will there be periodic setbacks?  Sure, maybe even multi-year setbacks of the same sort we've seen many times before.  But in the long run?  As long as the American economy continues to function, then the stock market is going to keep going up.  And when the American economy ceases to function, I'll have bigger problems than my portfolio returns.

"In the 1990s, every dip in the stock market was hailed as a "buying opportunity," because the prevailing wisdom was that stocks always do well over the long haul.

And stocks usually do do well over the long haul, especially relative to bonds and cash. But there's one major exception to this: Stocks don't do well over the long haul when they're bought at extremely high prices.

When have we had extremely high prices for stocks?

Well, in the late 1920s, for example, just before the Great Crash and Great Depression. Stocks crashed nearly 80% and then moved sideways for more than two decades.  Note that it also took 18 years to recover from the malaise market of 1966-1982.

We also saw extremely high prices in Japan in the late 1980s. Stocks crashed there and are still falling nearly three decades later.

We had extremely high prices in the US in the late 1990s.

During all of those peak periods, stocks hit extreme prices relative to earnings. And in all of those periods so far, the "long run" required to do well if you bought stocks near the peak has been shockingly long." - http://www.businessinsider.com/stocks-for-the-long-run-dow-japan-2012-6

So yeah, the stock market always goes up.  But, if you buy really high (like right now), it could give you decades of poor returns.

Generally most people are going to get the effect of dollar cost averaging as they contribute to their retirement accounts over multiple years. Maybe if someone lump summed 100% of their retirement accounts all at the same time, then there is a very small chance that it would hurt them. That being said, if I were to somehow come across a large amount of money today(say 5 million), it would all go into VTSAX tomorrow.

[tj]

Just gotta stay diversified - bonds, REITS, International, Gold if need be - it took me a few painful years but I'm finally where I want to be.

If you're 100% US stocks and that's all your looking at then of course you're asking for wild swings along with your long term returns and yes look vs other asset classes the US could be due for a thrashing, but when exactly and when will you get back in?

Look if you're too afraid of the stock market then just stay out - you seem to be doing pretty well for yourself - the main lesson I've learned is that you'll kill yourself sweating over this stuff, when to get in, what to get into, when to get out - it's not worth it - that's why Im scaling back my risk and letting a robo advisor take care of it.

All I'm afraid of is getting into the market at one of the most overvalued times in history.  It's not like it's kinda sorta overvalued.  It's through the roof if you factor in corporate profit margins being at record highs.  If you look at history, periods when valuations are this high do not last for long.  The run up can take a while (5 to 10 years), but the fall is fast and hard (usually bottoming in 2 to 3 years from the peak).  I'm not waiting for the market to crater, it may never.  I'm waiting for it to be fairly priced.  Once it's fairly priced, I'll start averaging in.

I would disagree with your assertion that we are in one of the most overvalued times in history.

[Keith123]

I figure the energy sector (shiller pe of 11) is the best opportunity for safety in a declining market and out performance in a rising market.

Sure, except that there are real reasons why the "energy" aka carbon sector is down right now and is expected to decline even further.  Just looking at the CAPE ignores a lot of useful information about future return expectations.

Which highlights the whole efficient market reasoning for not trying to time the market.  Energy is down because there is an oversupply of oil.  The oversupply isn't going away any time soon, despite what the P/E is telling you.  I think it will recover eventually, but I have no faith it will outperform other market sectors over the next year or two.

I have been following energy very closely.  You are correct about the oversupply.  However, supply and demand will come into balance.  It already is starting.  The world rig count has dropped from around 3600 in late 2014 to a little over 2000 today. The oversupply is really not that much believe it or not.  Just a few percent.  If you look into it, future production is going lag demand as so much capital spending in the industry has been cut or delayed due to this downturn.  This is going to eventually reverse itself and push prices higher.  I'm not saying we are going back to $100 oil but it's a pretty easy call that it's not going to be at $30 forever.  It could go down from here but I think it is really easy to see that it is going to be significantly higher in the future.  Pretty simple supply and demand economics.  In my opinion, barring some new revolutionary energy breakthrough or a really bad global recession, the energy sector is the best bet in the entire market right now.

[Keith123]

Ok.  I'll admit I don't have a perfect plan and I may kick myself later.

Seriously, what would any of you guys do?  I'm open to suggestions.

What would I do? I'd figure out a globally diverse AA that I like and invest my money in it now.

I don't have $200K to drop in at one shot though so if that bothers you do it slowly 10%/week or month to spread out the buying.

What I would not do myself is buy sector ETFs especially energy. There is no reason they have to return to higher values anytime soon. All it takes is one "extra" barrel of oil to keep that price down for a long long time. That could come about for all sorts of reasons: low demand, over supply, government regulations and tech disruptions. As other folks have said that amounts to speculation not investing. In fact I sold my energy sector ETF holdings [develop under old FA] in 2015 and moved that money into US, CDN and Int'l Index ETFs. This way I still hold lots of energy stocks, but I am well diversified.

Since you seem concerned both about your strategy and the "conventional" investing approach how about splitting that money into 2 pots? Invest 50% into VTI and 50% into sector ETFs that you think are under valued. That way whichever approach wins out you'll have a solid return from it.

I don't know why I didn't think of that.  Good idea. 

[Livewell]

Profits are very healthy and P/E is a reasonable 17 for S&P500, although some sectors like oil related and tech unicorns are in bad shape.  Some momentum stocks have come back to earth.  Yes, we're going through a bit if correction now but I think the key thing to keep in mind is things continue to improve in the real economy. It's not 1999 or 2008.  There are simply too many people trying to talk down the market...where is the irrational exuberance?  I see a lot of "steady as she goes" out there.   Lots of companies and consumers with much better balance sheets.  Do you not think there is a good chance we'll be a decent clip higher in 5 years?   I do.

I think if you're unsure when to get in just buy a chunk every quarter.   I'm still working, and I like to build up a decent cash savings and then buy below a target (for me 1900 on S&P right now, which I've done several times since last summer, including today.)

The math says it's better to buy lump sum but you will feel better about it.  I do.

Added:  if you're looking for value, why not buy commodities?  Not for me, I like "big and dumb" Index funds but Keith it sounds like you are looking for "fair price" and now is the Jan 2009 for oil.

[Keith123]

Profits are very healthy and P/E is a reasonable 17 for S&P500, although some sectors like oil related and tech unicorns are in bad shape.  Some momentum stocks have come back to earth.  Yes, we're going through a bit if correction now but I think the key thing to keep in mind is things continue to improve in the real economy. It's not 1999 or 2008.  There are simply too many people trying to talk down the market...where is the irrational exuberance?  I see a lot of "steady as she goes" out there.   Lots of companies and consumers with much better balance sheets.  Do you not think there is a good chance we'll be a decent clip higher in 5 years?   I do.

I think if you're unsure when to get in just buy a chunk every quarter.   I'm still working, and I like to build up a decent cash savings and then buy below a target (for me 1900 on S&P right now, which I've done several times since last summer, including today.)

The math says it's better to buy lump sum but you will feel better about it.  I do.

Added:  if you're looking for value, why not buy commodities?  Not for me, I like "big and dumb" Index funds but Keith it sounds like you are looking for "fair price" and now is the Jan 2009 for oil.

I absolutely agree about oil.  I have bought 7k worth of VDE this week.  I plan on adding to this position throughout the year.  If everything continues as is, oil supply and demand will balanced by next year.  The big question is if there is going to be a global recession that hurts oil demand.  I'm not gonna miss this opportunity though. 

[Wads]

Dude, I have *no* idea how you're going to figure out what's properly under-valued.  And messing around with commodity sectors is more like speculation (AKA "gambling") than investing properly.  Why the hell would you take the difficult path?  For an extra 1 or 2% more than you need for FIRE?  The majority of stats show that not only will you not be able to do that, but you won't meet the market benchmark.  So, why?  Why do it a difficult way that you're always guessing and juggling?  Seriously--if figuring out things which were "under-valued" was easy-peasy, none of us would bother with index investing and just buy undervalued company stocks directly all the time.

Do you realize that if the s&p were to be valued near its historical averages, according to several measures like the buffett indicator and the shiller pe, it would have to fall by around 30% to 35% from where it is now?  And that's just for it to be back to it's average valuation.

I don't want to go the hard way. I would love if the market was fairly valued or under-valued.  I'd go all in and hold forever.  I'm not trying to squeeze an extra 1% or 2%.  I actually don't even like thinking about investments.  It's my dream to be fully invested in market index fund someday and to leave it there forever.  I just need a buying window to do it.  In the meantime, I think I have to do it the hard way until the total market comes back to normal levels.  I just truly believe that this is going to one of the worst times in modern history to get into the market.  Everyone's returns look great from the past because we are at a huge peak...even with the recent drops in the market.  How will returns look if the S&P returns to historical valuations and stays there?  Everyone will have had a 0% or negative return since 1997/1998 (adjusted for inflation and not including dividends). This 20 year period of over-valuation is not normal.  It will end, I just don't know when.  Only 2 times in the history of the stock market have valuations been this high - 2000 and 2007/2008.  Doesn't that scream over-valued and unsustainable to anyone else?  Maybe I'm doing the math wrong but that's how I see it. 

Just to top it all off by the way, corporate profit margins are at record highs.  Roughly 10% vs. 6.5% historical average.  That just goes to further the case that the market is over the top.  I don't think the world is going to end by any means, but where we are is simply not sustainable.  I wish I was optimistic enough to think that things will just keep going up forever, but history paints a much different picture.  Look at Japan.  Stock market peaked in 1990 and hasn't recovered since.  Don't think it can't happen here too.       

Your math isn't wrong, everything you have stated here is a fact. Owning the broad stock market at todays valuation offers less than 1% annual return over the next decade along with a double-digit potential drawdown. This is essentially risking dollars to make pennies.

[lavagirl]

Would now be a good time to move tsp funds to the G fund?

[Keith123]

Would now be a good time to move tsp funds to the G fund?

The only place I'm putting money right now is oil.  Specifically Vanguard's energy index, VDE.  Everything else is too expensive.  Oil has obviously crashed.  It may stay down and keep going down for the next year or two but I strongly believe that oil will be significantly higher in the future.  I've done my due diligence.  5 years from now, I am confident we will be looking at much higher oil prices and a recovered energy sector. 

The 2 biggest risks:  1.  Technology disruption in the energy sector.  2. Global recession that lowers oil demand significantly.

[ender]

Just gotta stay diversified - bonds, REITS, International, Gold if need be - it took me a few painful years but I'm finally where I want to be.

If you're 100% US stocks and that's all your looking at then of course you're asking for wild swings along with your long term returns and yes look vs other asset classes the US could be due for a thrashing, but when exactly and when will you get back in?

Look if you're too afraid of the stock market then just stay out - you seem to be doing pretty well for yourself - the main lesson I've learned is that you'll kill yourself sweating over this stuff, when to get in, what to get into, when to get out - it's not worth it - that's why Im scaling back my risk and letting a robo advisor take care of it.

All I'm afraid of is getting into the market at one of the most overvalued times in history.  It's not like it's kinda sorta overvalued.  It's through the roof if you factor in corporate profit margins being at record highs.  If you look at history, periods when valuations are this high do not last for long.  The run up can take a while (5 to 10 years), but the fall is fast and hard (usually bottoming in 2 to 3 years from the peak).  I'm not waiting for the market to crater, it may never.  I'm waiting for it to be fairly priced.  Once it's fairly priced, I'll start averaging in.

There have been posts like this on this forum for multiple years now.

SP500 is about where it was at on January 1st, 2014 (ignoring dividend reinvestment). It's about 20% higher than January 1st, 2013 and there were plenty of people saying the same thing then.

[Keith123]

Just gotta stay diversified - bonds, REITS, International, Gold if need be - it took me a few painful years but I'm finally where I want to be.

If you're 100% US stocks and that's all your looking at then of course you're asking for wild swings along with your long term returns and yes look vs other asset classes the US could be due for a thrashing, but when exactly and when will you get back in?

Look if you're too afraid of the stock market then just stay out - you seem to be doing pretty well for yourself - the main lesson I've learned is that you'll kill yourself sweating over this stuff, when to get in, what to get into, when to get out - it's not worth it - that's why Im scaling back my risk and letting a robo advisor take care of it.

All I'm afraid of is getting into the market at one of the most overvalued times in history.  It's not like it's kinda sorta overvalued.  It's through the roof if you factor in corporate profit margins being at record highs.  If you look at history, periods when valuations are this high do not last for long.  The run up can take a while (5 to 10 years), but the fall is fast and hard (usually bottoming in 2 to 3 years from the peak).  I'm not waiting for the market to crater, it may never.  I'm waiting for it to be fairly priced.  Once it's fairly priced, I'll start averaging in.

There have been posts like this on this forum for multiple years now.

SP500 is about where it was at on January 1st, 2014 (ignoring dividend reinvestment). It's about 20% higher than January 1st, 2013 and there were plenty of people saying the same thing then.

And it can go much, much higher and get much, much crazier.  Tulip mania style - https://en.wikipedia.org/wiki/Tulip_mania.  That doesn't make it a good investment.  I just read this article this morning - http://finance.yahoo.com/news/grantham-stock-market-sell-off-110000114.html

He, like me, believes stocks are expensive.  "The U.S. equity market, although not in bubble territory, is very overpriced (+50% to 60%) and the outlook for fixed income is dismal."

I don't care about buying into a market that is 10% over-priced, not I'm not touching a market that as expensive as this one is right now.  It's not just the P/E.  It's the fact that corporate profit margins are at record highs (10% vs historical average or 6.5%).  That means you'd have to take 35% of the earnings out of the s&p to value it correctly, or at least historically.  Current S&P earnings are $90.12 - http://www.multpl.com/s-p-500-earnings/.  Take 35% off of that you get $58.58.  Now take the S&P price of 1880 and divide by the $58.58 and you have a S&P P/E of 32.09.  So yeah, I'd say the market is significantly overpriced.  Just for giggles, add record low interest rates to the mix.  This is not sustainable.  At all.  I don't know when it will come down, but it will. 

[Retire-Canada]

So the market is overvalued and you are not going to invest.

Instead you will invest in oil which is low due to oversupply.

Since none of the major producers can or are willing to drop production and we are not at full production currently what you need to happen for oil to go up dramatically is:

1. world economies to hit a new high gear and burn more oil
2. ^^ this to occur at such a rate that you overcome all the new marginal producers that will jump back into the game if oil climbs back towards $60/barrel

Doesn't this scenario require the market to go up substantially from where it is now?

How do you see a 50% correction in the market while it's gobbling up oil at super high rates?

If the market corrects down 50% oil is going to drop even further.

I guess I don't see a path for this strategy to work out.

[YoungInvestor]

Just gotta stay diversified - bonds, REITS, International, Gold if need be - it took me a few painful years but I'm finally where I want to be.

If you're 100% US stocks and that's all your looking at then of course you're asking for wild swings along with your long term returns and yes look vs other asset classes the US could be due for a thrashing, but when exactly and when will you get back in?

Look if you're too afraid of the stock market then just stay out - you seem to be doing pretty well for yourself - the main lesson I've learned is that you'll kill yourself sweating over this stuff, when to get in, what to get into, when to get out - it's not worth it - that's why Im scaling back my risk and letting a robo advisor take care of it.

All I'm afraid of is getting into the market at one of the most overvalued times in history.  It's not like it's kinda sorta overvalued.  It's through the roof if you factor in corporate profit margins being at record highs.  If you look at history, periods when valuations are this high do not last for long.  The run up can take a while (5 to 10 years), but the fall is fast and hard (usually bottoming in 2 to 3 years from the peak).  I'm not waiting for the market to crater, it may never.  I'm waiting for it to be fairly priced.  Once it's fairly priced, I'll start averaging in.

There have been posts like this on this forum for multiple years now.

SP500 is about where it was at on January 1st, 2014 (ignoring dividend reinvestment). It's about 20% higher than January 1st, 2013 and there were plenty of people saying the same thing then.

And it can go much, much higher and get much, much crazier.  Tulip mania style - https://en.wikipedia.org/wiki/Tulip_mania.  That doesn't make it a good investment.  I just read this article this morning - http://finance.yahoo.com/news/grantham-stock-market-sell-off-110000114.html

He, like me, believes stocks are expensive.  "The U.S. equity market, although not in bubble territory, is very overpriced (+50% to 60%) and the outlook for fixed income is dismal."

I don't care about buying into a market that is 10% over-priced, not I'm not touching a market that as expensive as this one is right now.  It's not just the P/E.  It's the fact that corporate profit margins are at record highs (10% vs historical average or 6.5%).  That means you'd have to take 35% of the earnings out of the s&p to value it correctly, or at least historically.  Current S&P earnings are $90.12 - http://www.multpl.com/s-p-500-earnings/.  Take 35% off of that you get $58.58.  Now take the S&P price of 1880 and divide by the $58.58 and you have a S&P P/E of 32.09.  So yeah, I'd say the market is significantly overpriced.  Just for giggles, add record low interest rates to the mix.  This is not sustainable.  At all.  I don't know when it will come down, but it will.

Why would you cut 35% of the profit? Of course it's near record highs. It is often really close to that. That's what companies do. They increase their profit over time.

[Keith123]

So the market is overvalued and you are not going to invest.

Instead you will invest in oil which is low due to oversupply.

Since none of the major producers can or are willing to drop production and we are not at full production currently what you need to happen for oil to go up dramatically is:

1. world economies to hit a new high gear and burn more oil
2. ^^ this to occur at such a rate that you overcome all the new marginal producers that will jump back into the game if oil climbs back towards $60/barrel

Doesn't this scenario require the market to go up substantially from where it is now?

How do you see a 50% correction in the market while it's gobbling up oil at super high rates?

If the market corrects down 50% oil is going to drop even further.

I guess I don't see a path for this strategy to work out.

Here's the path: 

1.  If the market stays high, demand stays the same and supply/demand comes into balance at the end of this year. 

2.  If the market crashes, supply growth will decline, at a fast pace, to eventually meet whatever the decreased demand is.  This is because of the large reductions is capex spending by the oil industry.  With less exploration and new drilling, new wells, etc., supply is going to fall.  Yes, the price of oil could go down drastically even from these depressed levels in a market crash.  However, it's the eventual declining supply that will support prices in either scenario over the longer term.  The longer the price stays low, the faster the supply and demand balance will come.  Also, if the market does crash, the entire US oil industry will be toast as well as any other high cost producer.  OPEC will have won.  And then, I would suspect, with OPEC in full control of the world oil industry again, they would again collude on production to raise the price. 

Either way, oil goes up long term.  Just my opinion. 

[Keith123]

Just gotta stay diversified - bonds, REITS, International, Gold if need be - it took me a few painful years but I'm finally where I want to be.

If you're 100% US stocks and that's all your looking at then of course you're asking for wild swings along with your long term returns and yes look vs other asset classes the US could be due for a thrashing, but when exactly and when will you get back in?

Look if you're too afraid of the stock market then just stay out - you seem to be doing pretty well for yourself - the main lesson I've learned is that you'll kill yourself sweating over this stuff, when to get in, what to get into, when to get out - it's not worth it - that's why Im scaling back my risk and letting a robo advisor take care of it.

All I'm afraid of is getting into the market at one of the most overvalued times in history.  It's not like it's kinda sorta overvalued.  It's through the roof if you factor in corporate profit margins being at record highs.  If you look at history, periods when valuations are this high do not last for long.  The run up can take a while (5 to 10 years), but the fall is fast and hard (usually bottoming in 2 to 3 years from the peak).  I'm not waiting for the market to crater, it may never.  I'm waiting for it to be fairly priced.  Once it's fairly priced, I'll start averaging in.

There have been posts like this on this forum for multiple years now.

SP500 is about where it was at on January 1st, 2014 (ignoring dividend reinvestment). It's about 20% higher than January 1st, 2013 and there were plenty of people saying the same thing then.

And it can go much, much higher and get much, much crazier.  Tulip mania style - https://en.wikipedia.org/wiki/Tulip_mania.  That doesn't make it a good investment.  I just read this article this morning - http://finance.yahoo.com/news/grantham-stock-market-sell-off-110000114.html

He, like me, believes stocks are expensive.  "The U.S. equity market, although not in bubble territory, is very overpriced (+50% to 60%) and the outlook for fixed income is dismal."

I don't care about buying into a market that is 10% over-priced, not I'm not touching a market that as expensive as this one is right now.  It's not just the P/E.  It's the fact that corporate profit margins are at record highs (10% vs historical average or 6.5%).  That means you'd have to take 35% of the earnings out of the s&p to value it correctly, or at least historically.  Current S&P earnings are $90.12 - http://www.multpl.com/s-p-500-earnings/.  Take 35% off of that you get $58.58.  Now take the S&P price of 1880 and divide by the $58.58 and you have a S&P P/E of 32.09.  So yeah, I'd say the market is significantly overpriced.  Just for giggles, add record low interest rates to the mix.  This is not sustainable.  At all.  I don't know when it will come down, but it will.

Why would you cut 35% of the profit? Of course it's near record highs. It is often really close to that. That's what companies do. They increase their profit over time.

Please see the attached chart.  Companies do not typically have a profit margin of 10% or higher like they do now.  They typically earn 6.5% profit margins.  This is why I take 35% off the S&P earnings.  This is over the history of the market.  We are in the only period in history that it has been this high.  Reversion to the mean happens.  I think it is a bit foolish to think that "this time is different".

[ender]

Please see the attached chart.  Companies do not typically have a profit margin of 10% or higher like they do now.  They typically earn 6.5% profit margins.  This is why I take 35% off the S&P earnings.  This is over the history of the market.  We are in the only period in history that it has been this high.  Reversion to the mean happens.  I think it is a bit foolish to think that "this time is different".

It seems more reasonable to take this as a given, translating record profit margins to be a basis for expecting better SP500 performance, rather than arbitrarily assuming that companies will get less efficient because they always have been.

Realistically, with the world becoming safer, mature, and more stable globally it seems totally logical that combination should increase profit margins. These are all factors which cannot be meaningfully normalized out of the data.

I also expect that your chart would look very different if it was broken down by sector.