The Money Mustache Community

Learning, Sharing, and Teaching => Investor Alley => Topic started by: supershrpy on February 27, 2017, 07:18:57 PM

Title: Does anyone think we are in a bubble?
Post by: supershrpy on February 27, 2017, 07:18:57 PM
Does anyone think we are in a stock market bubble? Reason I am asking is that I have seen different headlines suggesting contradictory information. Just read an article that said Warren Buffett said we are not in a stock market bubble because things are cheap with interest rates. The same article seemed to suggest we could be in a bull market for another 6-8 years with DJIA hitting 4k. Other people say that in around March things are going to go towards a correction.

My main concern is that I just started investing in my 401k last October and about a month or so ago started my Roth IRA with vanguard total stock market index funds of 3k. I am concerned if I should move my investments over to some sort of "safe fund" where they could be protected from such a correction. Also, if we are headed towards a correction I was wondering if I should just stop investing and try to pay off my house in the meantime or just save the cash and invest when it comes time. The problem is that money from my check is going to my 401k and I can't invest after I get paid. And a Roth IRA the max is 5,500 a year. I owe around 32k on my house. I contribute 30% to my 401k now and the rest goes monthly to maxing out the Roth. I also have a second job to invest or pay off house. What are everyone's thoughts on this??
Title: Re: Does anyone think we are in a bubble?
Post by: WildJager on February 27, 2017, 08:02:30 PM
Stay the course with your planned asset allocation.  Ignore market fears.  The whole point of developing a well thought out plan, and then execution that plan, is because regardless of what you see in the news, no one knows the future to any degree of fidelity.  Will there be a correction?  Sure, at some point.  But no one knows exactly when that point is, or what the bottom of that will be.  In other words, the people who have been waiting to invest because we were overvalued in, let's just say for this example, 2014 have missed out on a lot of gains.  Especially those gains since December. 

What you're asking basically is, "Should I time the market?"  And the answer is, unequivocally, no.  There is just too much data to process for the average investor. 

Another way of stating this is, do you check on the value of your house monthly and take out equity depending on when that value is too high?  If the answer is no, then it should be the same for your investments.  Your goal is the long game, and the upward trend line on the value of your portfolio, not the month to month speculation of the equity.
Title: Re: Does anyone think we are in a bubble?
Post by: Radagast on February 27, 2017, 08:43:48 PM
I just made this handy "Radagast's Guide to Bubbles" that I was thinking about posting sometime, now is as good a time as any. It is an arbitrary method completely made up rule of thumb based on multiples of 1.4 (actually square root of 2), which I learned in my previous hobby of photography. In short: No. Come back if prices rise 20% over the next year though and I will issue a "bubble watch." Right now we are well within "high price advisory."

P/(E10) Multiple Range
100   +   Black Swan Event
71   100   Extraordinary Bubble
50   71   Bubble Warning
35   50   Bubble Watch
25   35   High Price Advisory <--29.5ish right now
18   25   Normal Market Conditions
12.5   18   Low Price Advisory
8.8   12.5   Fire Sale Watch
6.3   8.8   Fire Sale Warning
4.4   6.3   Extraordinary Fire Sale
-   4.4   Black Swan Event
You can find the current price of the S&P500 divided by its trailing 10-year average earnings here: http://www.multpl.com/shiller-pe/

Another classic sign of a bubble is a flat or inverted yield curve, which means investors are buying longer term bonds because they are concerned about a bubble popping in the short term. This causes short term rates to be higher than long term rates. Notice that the yield curve was flat or inverted in 1998, 1999, 2000, 2006, and 2007. Right now the yield curve is steep and consistent, which means the bond market does not see a bubble. The collective bond market is pretty smart. You can investigate for yourself here: https://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/Historic-Yield-Data-Visualization.aspx
Title: Re: Does anyone think we are in a bubble?
Post by: marty998 on February 27, 2017, 11:46:12 PM
Interesting you think 18-25 is normal. In the Australian market we'd consider 13-16 to be normal.

If our market was over 20 I would call that bubble territory.

29.5 is insanity to me - better have some extraordinary profit growth to back that up...
Title: Re: Does anyone think we are in a bubble?
Post by: bigchrisb on February 28, 2017, 01:59:44 AM
I'd agree on the "normal" range for Aus being 13-16 based on the next year's PE.  However, I think they are using the PE10 (from Shiller), which looks at the earnings over the last 10 years compared to the current price.   I've not been able to find this stat for the Aus market, but assuming earnings grow over time, it should typically be a bigger number than current year PE?
Title: Re: Does anyone think we are in a bubble?
Post by: marty998 on February 28, 2017, 03:32:15 AM
I'd agree on the "normal" range for Aus being 13-16 based on the next year's PE.  However, I think they are using the PE10 (from Shiller), which looks at the earnings over the last 10 years compared to the current price.   I've not been able to find this stat for the Aus market, but assuming earnings grow over time, it should typically be a bigger number than current year PE?

Ahh I see. Yes you would expect then the P/Es to be quite a bit higher.
Title: Re: Does anyone think we are in a bubble?
Post by: Mr Mark on February 28, 2017, 04:45:28 AM
Things are certainly looking a bit frothy! PE(10) is today just under 30. So I share your concerns.

However, I'd just add that the P/E - however measured - will relate to alternative investments. When interest rates of 'risk free' US Treasuries are effectively zero (German equiv are actually negative), and even long term 30 year rates are <4%, it's not surprising that the price of buying a dividend stream goes up. Earnings growth is also good, and global alternatives look mediocre too.

So, yes, historically current PE(10) ratios are (very) high. But at current interest rates, arguably not unexpected. Where else to put your cash?

Being 100% stock invested lately has looked like a great strategy. It's possible (nay, likely) there's a significant correction coming and then a more bond heavy portfolio will look clever (even tho' interest rates going up will reduce bond prices) if you then rebalance (sell bonds to buy stock). But cash really hurts, as you gain no compounded dividend, and markets are often 'at all time highs', so trying to time the market is an historically unsuccessful strategy. This bull market could go for 2 more years easy, or it could drop like a rock tomorrow.

A slow correction via inflation may be what happens, and then the hold cash option would be really bad.

So I'm personally pretty 'bond' & RE heavy right now  - most of that outside my control - and letting my cash reserve build a bit for now. But I'm still reinvesting dividends. There just doesn't seem a better long term strategy than regular DCA/buy and hold in low cost index at an AA you are comfortable with in good and bad times.





Title: Re: Does anyone think we are in a bubble?
Post by: Dicey on February 28, 2017, 05:10:02 AM
Meh.

Modified to add: The market doesn't care what I think.
Title: Re: Does anyone think we are in a bubble?
Post by: MasterStache on February 28, 2017, 05:34:41 AM
As long as you stay the course, don't worry about the market or what anybody else says, you are already in a "safe fund." If the market goes down, so what, keep buying. You just buy on sale!

I might have read the same Buffet article. He also insist your greatest enemy is fear. Don't buy into the fear and you'll be fine. I've been hearing that the market is overvalued for years now. And yet I just keep investing.
Title: Re: Does anyone think we are in a bubble?
Post by: cheapass on February 28, 2017, 06:14:42 AM
When I go stock up on toilet paper and then it goes on sale the next week, I don't panic and sell what I have... I buy more!

Sent from my SCH-I545 using Tapatalk

Title: Re: Does anyone think we are in a bubble?
Post by: AdrianC on February 28, 2017, 07:01:22 AM
Buffett:

http://www.cnbc.com/2017/02/27/billionaire-investor-warren-buffett-speaks-with-cnbcs-becky-quick-on-squawk-box.html

Quick: In terms of what the message is you want to get across to people, I mean, when we're looking at markets at such high levels, as Joe was just alluding to, it has a lot of doubters and a lot of people saying: "Wait, it's too late for me to get in. I've missed it. We're past Dow 20k, now I have to wait for the pullback." What would you say to someone like that?

Buffett: Well, I would say they don't know, and I don't know. And if there's a game it's very good to be in for the rest of your life, the idea to stay out of it because you think you know when to enter it-- is a terrible mistake. I don't know anybody that can time markets over the years. A lot of people thought they can. But, if you were buying a farm and you decided that farms were gonna be worth more money ten, or 20, or 30 years from now and that would be a productive asset, go out and buy it unless it was just ... some absurd price. And the best thing with stocks actually is to buy 'em consistently over time. You wanna spread the risk as far as the specific companies you're in by owning a diversified group, and you diversify over time by buying this month, next month, the year after, the year after, the year after. I ... but you ... making a terrible mistake if you stay out of a game that you think is going to be very good over time because you think you can pick a better time to enter it.

Title: Re: Does anyone think we are in a bubble?
Post by: nihilism122 on February 28, 2017, 07:54:43 AM
I've been investing for almost six years and one thing I have noticed is that someone always thinks we're in a bubble.  The markets have risen substantially over that period of time.  The S&P 500 was around 1100 when I started investing.
Title: Re: Does anyone think we are in a bubble?
Post by: koshtra on February 28, 2017, 08:01:17 AM
Well, sure, I think we're in a bubble. Equity prices are on the high side. But it could be a bubble that pops tomorrow, or one that pops twenty years from now. And "popping" could be a global depression, or frantic inflation, or... some other thing we don't even know about yet.

If Mr Buffet can't time markets, then I sure can't.

Really, it's a losing game to try to time the markets. Just assume your return on stocks, in the long run, is going to be 4 to 7 percent, and make decisions about paying off your mortgage accordingly. If you run speculative numbers on your options, with or without a correction, and with or without significant inflation, I think you'll find that it doesn't actually make much difference.
Title: Re: Does anyone think we are in a bubble?
Post by: Radagast on February 28, 2017, 08:43:07 AM
Interesting you think 18-25 is normal. In the Australian market we'd consider 13-16 to be normal.

If our market was over 20 I would call that bubble territory.

29.5 is insanity to me - better have some extraordinary profit growth to back that up...
I have read on the internet that US accounting standards changed c.a. 2000, which effectively makes current PE's about 5 points higher than they would have been before. I don't know how accurate that is, but it came from Larry Swedroe who should know what he is talking about. The internet bubble saw this in the 45's, while the Japanese bubble put it in the 90's, so I can't really say we are in a bubble right now. Of course stocks can crash at any time, though I perceive people to be sitting on too much money for them to crash right now.
Title: Re: Does anyone think we are in a bubble?
Post by: prognastat on February 28, 2017, 09:54:45 AM
I'm more of a fan of buying more when stocks "go on sale" after a crash. If you have the capability to temporarily either bring in some extra income from OT, cutting spending or working a side gig then do that when the market does crash and buy a little more than you usually would. You are unlikely to win big this way, but you may come slightly ahead and predicting when the crash is going to happen and selling just before is an extremely hard game to play. It is much easier to buy when low than to sell at a high right before a crash. Doing this for one specific stock would be a massive risk, but I believe doing this if you are buying diversified across the whole market such as low fee index funds it is a pretty safe strategy. Beyond this just putting constantly as soon as you have the money to put in is probably the best strategy by having your funds in the market for the longest time.
Title: Re: Does anyone think we are in a bubble?
Post by: Retire-Canada on February 28, 2017, 10:18:34 AM
http://www.express.co.uk/finance/city/772634/Warren-Buffet-investments-Dow-Jones-Trump-stock-market-bubble-CRASH

Buffet doesn't think there is a bubble and has invested $20B recently.
Title: Re: Does anyone think we are in a bubble?
Post by: Kaspian on February 28, 2017, 02:16:10 PM
...I am concerned if I should (1) move my investments over to some sort of "safe fund" where they could be protected from such a correction. Also, if we are headed towards a correction I was wondering if I should just (2) stop investing and try to pay off my house in the meantime or just save the cash and invest when it comes time...

People who have a solid index portfolio (possibly diversified) and do either or both of the 2 above always lose.  If you are having the thoughts above, it proves you haven't assessed your own risk tolerance properly.  Diversification isn't for everyone here, but it is for many of us.  25-40% in bonds never killed anyone. 
Title: Re: Does anyone think we are in a bubble?
Post by: Rimu05 on February 28, 2017, 02:28:19 PM
This to me is somewhat like asking if a fish knows it's wet. Bubbles are hard to predict and impossible to tell when you are in one. Really, we only ever know it was a bubble once it's burst.

Anything more is speculation. I say the precautions in my position is to increase emergency fund, but leave investments alone. History shows us that stock market crashes are cyclical. There's no point throwing bones and truth on a carpet and trying to prophecy here.

Last year was the first time I heard of Robert Kiyosaki and seeing so many good opinions, I clicked on his podcast and safe to say, it was off-putting. He was convinced 2016 was the year the market would crash terribly. Here, we are doing better than ever.
Title: Re: Does anyone think we are in a bubble?
Post by: Pylortes on February 28, 2017, 03:00:16 PM
I don't think we are in a bubble. I think the general market price has been going higher, and is historically on the high side right now.  Earnings have been growing for quite a few years (although they seem to be flattening out somewhat now and revenues are not really growing- much of the earnings games have come from cost cutting and companies buying back shares). There is a difference between stocks that are valued richly and a "bubble".  A bubble implies that there is no economic justification for the current prices.  I think there is ample justification for stocks having run up to the current high prices- 1.  Earnings growth over the past several years.  2. The possibility of future corporate tax reform 3.  The possibility of future increased infrastructure spending other other stimulus. 4. For US based mulitnationals that make a lot of their sales overseas- the possibility for a drop in the dollar. 

You can judge for yourself which, if any, of these factors will play out (and to what extent)- but the collective market seems to be increasing company valuations for these and some other future predictions.   If stocks kept going up and up for no underlying reason (I'm buying because my neighbor bought and just made a ton of money and I don't want to miss the boat!)- that would be a bubble.

Title: Re: Does anyone think we are in a bubble?
Post by: Indexer on February 28, 2017, 04:19:25 PM
Stay the course with your planned asset allocation.  Ignore market fears.

+1



On the note of P/E ratios, and CAPE(also called PE10) ratios: these do not predict market crashes. You can see high PE and CAPE ratios that last for years. They were high in 1996, but the tech bubble didn't burst until 2000. Markets don't normally crash just because PE and CAPE ratios are high. You normally need an event to happen that starts the crash.

All high PE and CAPE ratios tell you is that returns over the foreseeable future will likely be lower than historical averages. The logic is that when PE ratios are high part of the appreciation of the stock has been the PE ratio increasing, and not because of earnings. The opposite is also true, low PE ratios mean you have lots of room for price growth even if earnings stay flat. So there is a higher probability that we will see below average returns and a lower probability we will see above average returns over the next 10 years. However, even if stocks have lower than average returns they will probably still be higher than cash and bond returns.

Conclusion: Stay the course with your planned asset allocation.  Ignore market fears.
Title: Re: Does anyone think we are in a bubble?
Post by: YoungStache on February 28, 2017, 05:38:07 PM
What would you guys invest in now? Considering VTSAX is so high and VTIAX has not grown as much lately.

VTSAX?

VTIAX?

Or another vanguard fund?
Title: Re: Does anyone think we are in a bubble?
Post by: Retire-Canada on February 28, 2017, 05:41:53 PM
What would you guys invest in now? Considering VTSAX is so high and VTIAX has not grown as much lately.

VTSAX?

VTIAX?

Or another vanguard fund?

Follow your investment plan and your asset allocation. What do they say?
Title: Re: Does anyone think we are in a bubble?
Post by: Mr Mark on February 28, 2017, 10:47:19 PM
What would you guys invest in now? Considering VTSAX is so high and VTIAX has not grown as much lately.

VTSAX?

VTIAX?

Or another vanguard fund?

I like the look of #5 horse "Wow it's hot" running in race 6 at Santa Anita tomorrow. Bet it to win and place... ;-)
Title: Re: Does anyone think we are in a bubble?
Post by: larmando on March 01, 2017, 01:53:19 AM
My main concern is that I just started investing in my 401k last October and about a month or so ago started my Roth IRA with vanguard total stock market index funds of 3k.

Look at this from another perspective: suppose we are in a bubble, and the market crashes *gasp* 50% next month. That's amazing for you: you (temporarily) lose 50% of your 3k, or 1.5k and get to buy funds for the next bunch of years cheaper (unless it's a flash crash flash recover, in which case you can totally ignore it). Considering you may need about 200 times that 3k to retire, it's really nothing to worry about. When you'll be 50% or 60% through saving for retirement 1.5k will be a daily movement. Not only you don't know if we are in a bubble: you totally shouldn't care less.
Title: Re: Does anyone think we are in a bubble?
Post by: MustacheAndaHalf on March 01, 2017, 05:34:20 AM
The financial news media would be ignored if they didn't stir up fear and greed.  So if someone warns of a bubble, they make the front page.  What's less obvious is the person's track record - have they predicted correctly and consistently in the past?  Or do they keep telling people to sell every year?  The spoiler is that they have no ability to predict when the market will crash and when it will recover.  You don't need to listen to stories predicting the next crash.

I just made this handy "Radagast's Guide to Bubbles" what I was thinking about posting sometime, now is as good a time as any. It is an arbitrary method ...
An arbitrary method with no track record isn't a good start to providing investing advice.
Title: Re: Does anyone think we are in a bubble?
Post by: MasterStache on March 01, 2017, 10:02:37 AM
The financial news media would be ignored if they didn't stir up fear and greed.  So if someone warns of a bubble, they make the front page.  What's less obvious is the person's track record - have they predicted correctly and consistently in the past?  Or do they keep telling people to sell every year? The spoiler is that they have no ability to predict when the market will crash and when it will recover.  You don't need to listen to stories predicting the next crash.

I just made this handy "Radagast's Guide to Bubbles" what I was thinking about posting sometime, now is as good a time as any. It is an arbitrary method ...
An arbitrary method with no track record isn't a good start to providing investing advice.

See that's the thing. You know the saying, even a clock is right twice a day? They predict market doom year after year and when it doesn't happen no one really pays attention because everything is going swimmingly. And then suddenly the market drops and out comes the "see I told you so" without acknowledging they have been falsely predicting drops for years.
Title: Re: Does anyone think we are in a bubble?
Post by: Spork on March 01, 2017, 10:11:40 AM
Instructions on what to do with your 401k when the stock market is gaining slowly:
* buy low cost index funds with every paycheck

Instructions on what to do with your 401k when the stock market tanks:
* buy low cost index funds with every paycheck

Instructions on what to do with your 401k when the market is in a bubble:
* buy low cost index funds with every paycheck
Title: Re: Does anyone think we are in a bubble?
Post by: redrocker on March 01, 2017, 01:07:47 PM
My main concern is that I just started investing in my 401k last October and about a month or so ago started my Roth IRA with vanguard total stock market index funds of 3k. I am concerned if I should move my investments over to some sort of "safe fund" where they could be protected from such a correction. Also, if we are headed towards a correction I was wondering if I should just stop investing and try to pay off my house in the meantime or just save the cash and invest when it comes time. The problem is that money from my check is going to my 401k and I can't invest after I get paid. And a Roth IRA the max is 5,500 a year. I owe around 32k on my house. I contribute 30% to my 401k now and the rest goes monthly to maxing out the Roth. I also have a second job to invest or pay off house. What are everyone's thoughts on this??

I'm not sure if there's a bubble. Perhaps you didn't ask this explicitly, but a related question would be: "is there reason to expect a market correction soon?" While you shouldn't believe anyone who tells you they can predict the future, I suspect we will see a correction sometime this year. The market does seem overly exuberant about the new regime. But unless Congress basically starts rubberstamping the Orange One's plans, I think we'll see at least a momentary clawback of the election season and post-election gains.

What this means for me personally: I'm about 15% in cash right now and waiting for a correction. I didn't sell out of the market to time for a correction, this was a strategic sell-off of some old funds that I did in late 2016 for tax purposes. I admit that I *am* timing the market in terms of reinvesting those funds. I wouldn't give advice to anyone to do the same thing, that's me taking a gamble and I acknowledge that.

As for you and what you should do, I would not advise selling your current investments. Buy and hold, then stay the course. If you're feeling anxiety over $3,000 invested in equities, then you should have a higher bond allocation to protect yourself from market volatility. That's a personal choice and one you should ask yourself.

As for whether you should stop investing in the market at current prices and instead divert money to paying off your house or into savings, well, if I were you I think I'd split any surplus from your paycheck amongst all three of those options: 1/3 in the market, 1/3 additional principal towards your mortgage, 1/3 to cash savings for either emergency fund or for investing in the event of a correction. That way you hedge against a market correction in the short term but you'll also continue to benefit if the market continues to go up for months/years before a correction.

One other note, I don't know your income or retirement plans but have you evaluated whether a traditional IRA is better for you? You might want to consider a tIRA and then if you do early retirement on a low income for awhile you'd have the opportunity to do Roth conversions and get the best of both worlds.
Title: Re: Does anyone think we are in a bubble?
Post by: marty998 on March 01, 2017, 01:10:22 PM
Dow 21,000...

Onwards and upwards.
Title: Re: Does anyone think we are in a bubble?
Post by: Radagast on March 01, 2017, 01:23:50 PM
I just made this handy "Radagast's Guide to Bubbles" what I was thinking about posting sometime, now is as good a time as any. It is an arbitrary method ...
An arbitrary method with no track record isn't a good start to providing investing advice.
You are right, I changed it to "completely made up rule of thumb." Completely made up rules of thumb are an amazing source of investing advice :-)
Title: Re: Does anyone think we are in a bubble?
Post by: Heckler on March 01, 2017, 04:02:10 PM
Dow 21,000...

Onwards and upwards.

A great day for my planned first annual rebalancing!


???!??!?

Title: Re: Does anyone think we are in a bubble?
Post by: One Noisy Cat on March 01, 2017, 04:33:45 PM
We've been in a bubble ever since 1953 when the Dow surpassed its high in 1929 (yes, people were worried about that back in the day).

At least in a stock market, you are (or should be) re investing dividends and investing each pay day.
Other things such as gold, tulip bulbs, real estate don't pay dividends and may even need financing (low margin limits wiped out many a person in 1929 as they had to sell to meet margin requirements.)

We easily could get a 20% or even more drop in the market over a year's time: these things happen.
But my pension and social security revenues are greater than my monthly expenses so I'm investing the surplus in some blue chip stocks.
Title: Re: Does anyone think we are in a bubble?
Post by: boarder42 on March 01, 2017, 04:45:17 PM
The market could increase at inflation for the next year then bubble talk would stop.  The pe10 would.be back in normal grounds. Also the pe10 is high for 2 reason right now. 2009 BC earnings were in the toilet. Remove just that year and it eases back close to normal. Secondly this is an epically low time for interest rates. So between those 2. The PE may not be as overpriced as it looks. But either way. Who the hell cares. BC I'm not a magician. So it is what it is and I'll just keep dumping money in.

As a matter of fact my wife's car loan is almost up so I'm looking at used cars at a similar price to what we could sell hers for to buy a new one and dump that money back in. And take out another loan.
Title: Re: Does anyone think we are in a bubble?
Post by: AdrianC on March 02, 2017, 08:57:08 AM
Interesting chart - Inflation adjusted S&P 500:

http://www.multpl.com/inflation-adjusted-s-p-500
Title: Re: Does anyone think we are in a bubble?
Post by: cheapass on March 02, 2017, 09:05:27 AM
Interesting chart - Inflation adjusted S&P 500:

http://www.multpl.com/inflation-adjusted-s-p-500

I wonder if that's price only or includes DRIP?
Title: Re: Does anyone think we are in a bubble?
Post by: tooqk4u22 on March 02, 2017, 11:06:15 AM
Interesting chart - Inflation adjusted S&P 500:

http://www.multpl.com/inflation-adjusted-s-p-500

I wonder if that's price only or includes DRIP?

Probably excludes DRIP as point to point is only a 2.3% return...whereas the average dividend yield was 4.4% over that period.  Average earnings yield (inverse of PE) was 7.4%.
Title: Re: Does anyone think we are in a bubble?
Post by: solon on March 02, 2017, 12:05:03 PM
Here's one that includes the dividends.

http://thume.ca/indexView/
Title: Re: Does anyone think we are in a bubble?
Post by: AdrianC on March 03, 2017, 07:28:06 AM
Relevant and good article by Brooklyn Investor:

Buffett on Valuation
http://brooklyninvestor.blogspot.com/2017/03/buffett-on-valuation.html

Conclusion: Not in a bubble.
Title: Re: Does anyone think we are in a bubble?
Post by: frugal_c on March 04, 2017, 09:25:22 AM
I think we are in a bit of a bubble.  My plan from the get-go, was to slowly increase my bond allocation as the PE10 increases.  I don't have a solid rule on it but I am at 30% bonds and will gradually increase that.  3 years ago I was 25% bonds and 5 years ago it was about 15%.  With my approach you decrease your potential gain but you also decrease your possible loss.  In other words it is just a balancing act of return / loss.  15 to 20 year bear markets do happen and that would mess up my retirement.  I don't need crazy gains to retire, I am planning for 2% per year ahead of inflation over the next decade.   I am not willing to go 100% stocks just to shave a year or two off my retirement date.
Title: Re: Does anyone think we are in a bubble?
Post by: Kaspian on March 04, 2017, 12:04:41 PM
I think we are in a bit of a bubble.  My plan from the get-go, was to slowly increase my bond allocation as the PE10 increases.  I don't have a solid rule on it but I am at 30% bonds and will gradually increase that.  3 years ago I was 25% bonds and 5 years ago it was about 15%.  With my approach you decrease your potential gain but you also decrease your possible loss.  In other words it is just a balancing act of return / loss.  15 to 20 year bear markets do happen and that would mess up my retirement.  I don't need crazy gains to retire, I am planning for 2% per year ahead of inflation over the next decade.   I am not willing to go 100% stocks just to shave a year or two off my retirement date.

Yes, having your approximate age in bonds isn't a bad strategy.  I use my age minus 5 years.  As you get older, wealth preservation becomes increasingly important over growth.  (Caveat: There are philosophies which state the opposite, however.) I would never let this surpass something like 50-55% though because that's weighing one asset class too heavily.
Title: Re: Does anyone think we are in a bubble?
Post by: tiberius on March 05, 2017, 07:04:10 AM
I think we are in a bubble. Japanese and US stocks have shot up in the last 18 months.
Also the CAPE index is huge at the moment.
http://www.multpl.com/shiller-pe/
I would like to make some money from the bubble but not be caught out.
When it pops I will stay out of stocks for about 18 months. Then there were will a huge amount
of bargains available. So it's not all bad news.

I'm putting money into Gold ETF's and bonds at the moment but I'm not sure what the best
strategy is.
Title: Re: Does anyone think we are in a bubble?
Post by: Retire-Canada on March 05, 2017, 07:44:58 AM
I'm putting money into Gold ETF's and bonds at the moment but I'm not sure what the best
strategy is.

What happens if the bubble doesn't pop in 2017 or 2018? What happens if the growth of stocks just slows and maybe there is a small correction such that you don't get the chance to buy in at these prices again?

How long do you keep buying bonds/gold for?

People have been predicting the next big crash every year since the last big crash.
Title: Re: Does anyone think we are in a bubble?
Post by: chasesfish on March 05, 2017, 07:56:30 AM
I've been hearing about the bubble for four years...

Those who pulled out got hurt.  There's always someone predicting a bubble every week, so when there is a stock market drop, the person of the week is right.

I'd say track the PE of the S&P 500.  When that gets to all time highs, then its time to be conservative.
Title: Re: Does anyone think we are in a bubble?
Post by: boarder42 on March 05, 2017, 08:39:57 AM
I think we are in a bubble. Japanese and US stocks have shot up in the last 18 months.
Also the CAPE index is huge at the moment.
http://www.multpl.com/shiller-pe/
I would like to make some money from the bubble but not be caught out.
When it pops I will stay out of stocks for about 18 months. Then there were will a huge amount
of bargains available. So it's not all bad news.

I'm putting money into Gold ETF's and bonds at the moment but I'm not sure what the best
strategy is.

Sounds like a terrible plan.
Title: Re: Does anyone think we are in a bubble?
Post by: tiberius on March 05, 2017, 09:37:51 AM
I'm putting money into Gold ETF's and bonds at the moment but I'm not sure what the best
strategy is.

What happens if the bubble doesn't pop in 2017 or 2018? What happens if the growth of stocks just slows and maybe there is a small correction such that you don't get the chance to buy in at these prices again?

How long do you keep buying bonds/gold for?

People have been predicting the next big crash every year since the last big crash.

I'm gonig to do a three way split of
Gold ETF's
Bond Funds
Equity Tracker Funds

Then once a month rebalance so it's equal thirds.
So while we are in the bubble the equity tracker funds will go up, then I'll take some money out and put it into
the other pots.
If we go into actual downturn, I will probably cash in the equity tracker funds and not invest in them until the recovery.
Title: Re: Does anyone think we are in a bubble?
Post by: AdrianC on March 05, 2017, 10:45:19 AM
I think we are in a bubble. Japanese and US stocks have shot up in the last 18 months.
Also the CAPE index is huge at the moment.
http://www.multpl.com/shiller-pe/
I would like to make some money from the bubble but not be caught out.
When it pops I will stay out of stocks for about 18 months. Then there were will a huge amount
of bargains available. So it's not all bad news.

CAPE is high at 30. During the dot com bubble it got to 45. That's a bubble.

We would all like to get out at the top and back in at the bottom. I have no way to know so I'm not going to stress about it, not going to try. Buying during a downturn is hard. Can you do it?

Quote

I'm gonig to do a three way split of
Gold ETF's
Bond Funds
Equity Tracker Funds

Then once a month rebalance so it's equal thirds.
So while we are in the bubble the equity tracker funds will go up, then I'll take some money out and put it into
the other pots.
If we go into actual downturn, I will probably cash in the equity tracker funds and not invest in them until the recovery.

Have you seen the discussions on the Permanent Portfolio (4 way split) and Golden Butterfly (4 way split with equity having a 2/5 share)? proponents have reasons for the 4 way split. Why do you go with 3 way?
Title: Re: Does anyone think we are in a bubble?
Post by: tiberius on March 05, 2017, 11:39:18 AM
I think we are in a bubble. Japanese and US stocks have shot up in the last 18 months.
Also the CAPE index is huge at the moment.
http://www.multpl.com/shiller-pe/
I would like to make some money from the bubble but not be caught out.
When it pops I will stay out of stocks for about 18 months. Then there were will a huge amount
of bargains available. So it's not all bad news.

CAPE is high at 30. During the dot com bubble it got to 45. That's a bubble.

We would all like to get out at the top and back in at the bottom. I have no way to know so I'm not going to stress about it, not going to try. Buying during a downturn is hard. Can you do it?

Quote

I'm gonig to do a three way split of
Gold ETF's
Bond Funds
Equity Tracker Funds

Then once a month rebalance so it's equal thirds.
So while we are in the bubble the equity tracker funds will go up, then I'll take some money out and put it into
the other pots.
If we go into actual downturn, I will probably cash in the equity tracker funds and not invest in them until the recovery.

Have you seen the discussions on the Permanent Portfolio (4 way split) and Golden Butterfly (4 way split with equity having a 2/5 share)? proponents have reasons for the 4 way split. Why do you go with 3 way?

I've not seen discussions on the Permanent Portfolio or Golden Butterfly previously but I've had a look just now. There is a good website on the various
portfolios people have suggested here: https://portfoliocharts.com/portfolio/
The split I'm going for is because I'm expecting US stock prices to collapse soon-ish. If and when that happens and then US stocks are a bargain price,
I will change the percentages to something where equities are a much larger portion of the pie...
Title: Re: Does anyone think we are in a bubble?
Post by: StreetCat on March 05, 2017, 11:40:27 AM
"Bubble" is a vague term and I don't have a yes/no answer.  Right now isn't as bad as dot-com was in 2000, but right now US stock market is among the most expensive.

I am no longer buying US stocks due to high valuations.  There are other country ETFs/MFs out there which are significantly less expensive: http://www.starcapital.de/research/CAPE_Stock_Market_Expectations (http://www.starcapital.de/research/CAPE_Stock_Market_Expectations)

I do agree with the difficulties and near futility of market timing.  But at the same time, also be aware that if the US market crashes from this point and there is a 30, 40, 50% draw-down from your purchase point,  then you will have a LOT of difficulty staying the course due to psychological reasons.  You may end up selling at the worst possible time in a draw-down.  So, it's one kind of problem vs another.

If you can get into US markets now and leave your money in there for another 20-30 years and not look at it and not worry about it along the way, then I guess you can invest in the US markets.  If not, I would look elsewhere.
Title: Re: Does anyone think we are in a bubble?
Post by: Radagast on March 05, 2017, 11:45:34 AM
I'm putting money into Gold ETF's and bonds at the moment but I'm not sure what the best
strategy is.

What happens if the bubble doesn't pop in 2017 or 2018? What happens if the growth of stocks just slows and maybe there is a small correction such that you don't get the chance to buy in at these prices again?

How long do you keep buying bonds/gold for?

People have been predicting the next big crash every year since the last big crash.

I'm gonig to do a three way split of
Gold ETF's
Bond Funds
Equity Tracker Funds

Then once a month rebalance so it's equal thirds.
So while we are in the bubble the equity tracker funds will go up, then I'll take some money out and put it into
the other pots.
If we go into actual downturn, I will probably cash in the equity tracker funds and not invest in them until the recovery.
I don't think it is wise to have less than 50% in stocks in any case. Invest around the globe if you are concerned about a US bubble, and also as a general best practice. This goes doubly if you have less than 50% of your "number."
I don't think we are in a bubble.
I don't think Japan is in a bubble.
I don't think you know whether we are in a bubble.
Another classic sign of a bubble is a flat or inverted yield curve, which means investors are buying longer term bonds because they are concerned about a bubble popping in the short term. This causes short term rates to be higher than long term rates. Notice that the yield curve was flat or inverted in 1998, 1999, 2000, 2006, and 2007. Right now the yield curve is steep and consistent, which means the bond market does not see a bubble. The collective bond market is pretty smart. You can investigate for yourself here: https://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/Historic-Yield-Data-Visualization.aspx
Title: Re: Does anyone think we are in a bubble?
Post by: StreetCat on March 05, 2017, 11:49:18 AM
I've been investing for almost six years and one thing I have noticed is that someone always thinks we're in a bubble.  The markets have risen substantially over that period of time.  The S&P 500 was around 1100 when I started investing.
This is Outcome Bias: https://en.wikipedia.org/wiki/Outcome_bias (https://en.wikipedia.org/wiki/Outcome_bias)

If I flip a coin and purchase a stock based on the flip and the purchase makes me a big profit, it still doesn't justify my action of buying that stock based on a coin flip.  My decision to purchase that stock is still a bad decision, even though the decision gave rise to a positive outcome.

There may be many good reasons to keep buying US stocks at this time, but the fact that bubble-sayers have been proven wrong for the past few years isn't one of them.

Title: Re: Does anyone think we are in a bubble?
Post by: tiberius on March 05, 2017, 12:15:02 PM
Looking at the various suggested portfolio charts. I like the Ivy.
Title: Re: Does anyone think we are in a bubble?
Post by: AdrianC on March 06, 2017, 08:37:58 AM
The split I'm going for is because I'm expecting US stock prices to collapse soon-ish. If and when that happens and then US stocks are a bargain price,
I will change the percentages to something where equities are a much larger portion of the pie...
OK, but how will you know when to sell your stocks, and when to buy? That is the trick. Have you done it before? Did you do it in 2000 or 2008?

You can't wing it. You must have a plan - momentum, valuation, some other sort of timing signal. Be interested in hearing what your is.
Title: Re: Does anyone think we are in a bubble?
Post by: tiberius on March 06, 2017, 11:36:34 AM
The split I'm going for is because I'm expecting US stock prices to collapse soon-ish. If and when that happens and then US stocks are a bargain price,
I will change the percentages to something where equities are a much larger portion of the pie...
OK, but how will you know when to sell your stocks, and when to buy? That is the trick. Have you done it before? Did you do it in 2000 or 2008?

You can't wing it. You must have a plan - momentum, valuation, some other sort of timing signal. Be interested in hearing what your is.

When the CAPE number says less than 15.

http://www.multpl.com/shiller-pe/

That is when I will buy lots of US stocks.
Until then only 10% of my funds will be in US stocks.
Title: Re: Does anyone think we are in a bubble?
Post by: boarder42 on March 06, 2017, 11:55:59 AM
The split I'm going for is because I'm expecting US stock prices to collapse soon-ish. If and when that happens and then US stocks are a bargain price,
I will change the percentages to something where equities are a much larger portion of the pie...
OK, but how will you know when to sell your stocks, and when to buy? That is the trick. Have you done it before? Did you do it in 2000 or 2008?

You can't wing it. You must have a plan - momentum, valuation, some other sort of timing signal. Be interested in hearing what your is.

When the CAPE number says less than 15.

http://www.multpl.com/shiller-pe/

That is when I will buy lots of US stocks.
Until then only 10% of my funds will be in US stocks.

it could never get there.  and while its a good indicator putting all your eggs on the shiller doesnt make much sense.  we could have a 2015 year again and the shiller would get right back in line with a historical 4% SWR.  a crash doesnt HAVE to happen the market could sustainably grow over the next decade and you miss out on all the gains.
Title: Re: Does anyone think we are in a bubble?
Post by: boarder42 on March 06, 2017, 11:57:22 AM
every time anyone talks about a bubble all i hear is beerfest

https://www.youtube.com/watch?v=pZOKKtVbCKU

DE bubble ...
Title: Re: Does anyone think we are in a bubble?
Post by: Retire-Canada on March 06, 2017, 11:57:44 AM
When the CAPE number says less than 15.

http://www.multpl.com/shiller-pe/

That is when I will buy lots of US stocks.
Until then only 10% of my funds will be in US stocks.

What happens if you don't hit that metric in the next 10yrs and US stocks keep going up in price?
Title: Re: Does anyone think we are in a bubble?
Post by: AdrianC on March 06, 2017, 01:05:20 PM
When the CAPE number says less than 15.

http://www.multpl.com/shiller-pe/

That is when I will buy lots of US stocks.
Until then only 10% of my funds will be in US stocks.

The US market had a CAPE higher than 15 from 1990 to 2009 (20 years). There was a three-month window in 2009, then it went over 15 again until now (8 years).

You're basically looking for a 50% drawdown, a repeat of 2008/2009.

I hope we don't see that. It means something has gone very, very wrong.
Title: Re: Does anyone think we are in a bubble?
Post by: tiberius on March 06, 2017, 01:13:58 PM

Quote

it could never get there.  and while its a good indicator putting all your eggs on the shiller doesnt make much sense.  we could have a 2015 year again and the shiller would get right back in line with a historical 4% SWR.  a crash doesnt HAVE to happen the market could sustainably grow over the next decade and you miss out on all the gains.

No, I'm putting my eggs into 10 baskets. One of which is a US stock market tracker.
If it grows, I will gradually pull out the gains and buy other asset classes rebalancing as I go.

Should the US stock market half in value but nothing else, then I am down 5% overall.
I'm aiming for 5.3% returns overall.
Title: Re: Does anyone think we are in a bubble?
Post by: tiberius on March 06, 2017, 01:18:08 PM
When the CAPE number says less than 15.

http://www.multpl.com/shiller-pe/

That is when I will buy lots of US stocks.
Until then only 10% of my funds will be in US stocks.

The US market had a CAPE higher than 15 from 1990 to 2009 (20 years). There was a three-month window in 2009, then it went over 15 again until now (8 years).

You're basically looking for a 50% drawdown, a repeat of 2008/2009.

I hope we don't see that. It means something has gone very, very wrong.

I think we could see that in the next few years. Trump could trigger a trade war, or an actual war. Some Black Swan event could spook the market.
Anything could happen. The real question is how high do you think the CAPE could or should go?

US stocks are not cheap at the moment, the price could go up even further but it has to return to something approaching normality eventually.
Title: Re: Does anyone think we are in a bubble?
Post by: boarder42 on March 06, 2017, 01:20:23 PM
When the CAPE number says less than 15.

http://www.multpl.com/shiller-pe/

That is when I will buy lots of US stocks.
Until then only 10% of my funds will be in US stocks.

it could remain flat for the next 9 months and that would return it to normal

The US market had a CAPE higher than 15 from 1990 to 2009 (20 years). There was a three-month window in 2009, then it went over 15 again until now (8 years).

You're basically looking for a 50% drawdown, a repeat of 2008/2009.

I hope we don't see that. It means something has gone very, very wrong.

I think we could see that in the next few years. Trump could trigger a trade war, or an actual war. Some Black Swan event could spook the market.
Anything could happen. The real question is how high do you think the CAPE could or should go?

US stocks are not cheap at the moment, the price could go up even further but it has to return to something approaching normality eventually.
Title: Re: Does anyone think we are in a bubble?
Post by: bigfoot11 on March 06, 2017, 01:34:57 PM
Student loan bubble. That sucker is going to ruin a lot of people.
Title: Re: Does anyone think we are in a bubble?
Post by: Eric on March 06, 2017, 02:54:48 PM
Student loan bubble. That sucker is going to ruin a lot of people.

That's not a bubble.  Or at least not one that can actually pop.  It's not like you can just declare bankruptcy and get rid of them.
Title: Re: Does anyone think we are in a bubble?
Post by: ChpBstrd on March 06, 2017, 03:28:39 PM
If it's any consolation, I had about $100k invested when the 2008-2009 crisis happened. It was utterly terrifying. The news pundits were overlaying Great Depression charts with current charts and asking when the next 30% drop would happen. Layoffs everywhere. Numbers tanking left and right. Household name banks were disappearing. I lost more to the stock market in 2008 than I earned! Years of savings seemed to evaporate overnight. Even worse, if I lost my job and couldn't get another I'd be broke within a year!

I decided to invest cautiously for the next 9 years, keeping at least 20% in cash and another 30% in low-beta preferred stock, waiting to buy on the next drop. It seemed reasonable at the time.

The media helpfully informed me about how the national debt was spiraling out of control. Congress kept threatening not to renew the debt ceiling. Interest rates could rise at any minute. Commodities were crazy. China's market, which was surely a bubble the whole time, got scarier and scarier. Then Donald Trump, an obviously mentally ill person, was elected. PE ratios stayed above average, so I held back some more.

Now it's 2017, and I look back on a history of selling low and hoarding cash. My NW is $500k, but I realize I left at least $200k on the table by not staying invested over the years in a total market index fund like VTI.

By playing it "safe" for 9 years, I earned myself another FOUR YEARS of labor before financial independence. In other words, the effect of staying partially out of the market all these years has been the same as or worse than the financial crisis itself.

In the long run, the crisis cost me nothing. The shares I held onto recovered in due time. In fact, I even harvested some tax losses.

What I did with my own judgment, however, has permanently set back my aspirations. By playing it "safe" and waiting for a better time to buy, I lost a decent chunk of my remaining lifetime to a beige cubicle.

What would a 10% correction cost you at this point? The psychological angst of seeing a $500 paper loss? Learn to fear my outcome as much as you fear the correction, and you'll be all the wiser for it.
Title: Re: Does anyone think we are in a bubble?
Post by: Spork on March 06, 2017, 03:56:51 PM
If it's any consolation, I had about $100k invested when the 2008-2009 crisis happened. It was utterly terrifying. The news pundits were overlaying Great Depression charts with current charts and asking when the next 30% drop would happen. Layoffs everywhere. Numbers tanking left and right. Household name banks were disappearing. I lost more to the stock market in 2008 than I earned! Years of savings seemed to evaporate overnight. Even worse, if I lost my job and couldn't get another I'd be broke within a year!


I had considerably more than that and was taking a few years hiatus from work... a "mini-FIRE"... so I was actually living off of mine.  It was not terrifying to me.  It was infuriating.  I desperately wanted to be buying, but was instead drawing down.
Title: Re: Does anyone think we are in a bubble?
Post by: tiberius on March 06, 2017, 04:38:50 PM
I was working for Cisco Systems in 2000 as a contractor. When the crash happened they gave all contractors
they employed worldwide one months notice. ;)
It was a bad time for tech stocks.
I do think this is a bubble but I think it probably has a good while to go before the peak.

Actually some money to be made during the rise and after the collapse..
Title: Re: Does anyone think we are in a bubble?
Post by: boarder42 on March 09, 2017, 08:00:43 AM
The split I'm going for is because I'm expecting US stock prices to collapse soon-ish. If and when that happens and then US stocks are a bargain price,
I will change the percentages to something where equities are a much larger portion of the pie...
OK, but how will you know when to sell your stocks, and when to buy? That is the trick. Have you done it before? Did you do it in 2000 or 2008?

You can't wing it. You must have a plan - momentum, valuation, some other sort of timing signal. Be interested in hearing what your is.

When the CAPE number says less than 15.

http://www.multpl.com/shiller-pe/

That is when I will buy lots of US stocks.
Until then only 10% of my funds will be in US stocks.

One thing to keep in mind about CAPE is that it just looks back  and compares the price to the average inflation adjusted earnings over the last 10 years.  However, the credit crunch of '08 and '09 caused a significant drop in earnings which really only has the '29 crash as comparison, in my opinion.  (Note the earnings drop at '29, and then at '08). 

http://www.multpl.com/s-p-500-earnings/

Does this mean that in 2 years when the '08 and '09 earnings drop falls off the back end of the 10-year CAPE window that the CAPE will go back down, even if prices rise a good bit, from here?  Does that mean the market would be a better buy in two years and possibly at higher prices because an event that happened 8 years ago from today, has instead happened 11 years ago from two years in the future, and is no longer considered? Since the credit crunch was in the past, I think that CAPE would be more normal  based on todays prices if the '08-'09 crunch were normalized to a more ordinary cyclical earnings drop.

agree greatly with these CAPE points its something i evaluate as well you cant just take something on the surface for what it is.  08 the worst year should fall off in 2018 and then i'd really like to see the cape plummet with it.  also a flat market over any of the next few years pull the shiller cape back in line. 

you cant time just keep pumping money in as soon as you get it. unless its earmarked for more lucrative investments.
Title: Re: Does anyone think we are in a bubble?
Post by: AdrianC on March 09, 2017, 08:08:39 AM
One thing to keep in mind about CAPE is that it just looks back  and compares the price to the average inflation adjusted earnings over the last 10 years.  However, the credit crunch of '08 and '09 caused a significant drop in earnings which really only has the '29 crash as comparison, in my opinion.  (Note the earnings drop at '29, and then at '08). 

http://www.multpl.com/s-p-500-earnings/

Does this mean that in 2 years when the '08 and '09 earnings drop falls off the back end of the 10-year CAPE window that the CAPE will go back down, even if prices rise a good bit, from here?  Does that mean the market would be a better buy in two years and possibly at higher prices because an event that happened 8 years ago from today, has instead happened 11 years ago from two years in the future, and is no longer considered? Since the credit crunch was in the past, I think that CAPE would be more normal  based on todays prices if the '08-'09 crunch were normalized to a more ordinary cyclical earnings drop.

Try this:

https://dqydj.com/shiller-pe-cape-ratio-calculator/

Current 10 year: 31.325
Current 7 year: 27.732
Current 5 year: 27.595

27 is still very high.

Title: Re: Does anyone think we are in a bubble?
Post by: wenchsenior on March 09, 2017, 12:42:23 PM
If it's any consolation, I had about $100k invested when the 2008-2009 crisis happened. It was utterly terrifying. The news pundits were overlaying Great Depression charts with current charts and asking when the next 30% drop would happen. Layoffs everywhere. Numbers tanking left and right. Household name banks were disappearing. I lost more to the stock market in 2008 than I earned! Years of savings seemed to evaporate overnight. Even worse, if I lost my job and couldn't get another I'd be broke within a year!


I had considerably more than that and was taking a few years hiatus from work... a "mini-FIRE"... so I was actually living off of mine.  It was not terrifying to me.  It was infuriating.  I desperately wanted to be buying, but was instead drawing down.

THIS SO MUCH. Unfortunate life events conspired to force us to REDUCE our investing in late 2007, because we needed free cash for a huge upcoming load of expenses.  We were cash poor for about a year and half, during which time the the market tanked and I went near-crazy because we couldn't invest at fire sale prices.  The only good thing about it was it made us redouble our efforts to get back in a place where we had cash flow to invest again. 
Title: Re: Does anyone think we are in a bubble?
Post by: Eric on March 09, 2017, 01:22:08 PM
Try this:

https://dqydj.com/shiller-pe-cape-ratio-calculator/

Current 10 year: 31.325
Current 7 year: 27.732
Current 5 year: 27.595

27 is still very high.

27 is nowhere near bubble territory though.
Title: Re: Does anyone think we are in a bubble?
Post by: AdrianC on March 09, 2017, 05:38:22 PM
Try this:

https://dqydj.com/shiller-pe-cape-ratio-calculator/

Current 10 year: 31.325
Current 7 year: 27.732
Current 5 year: 27.595

27 is still very high.

27 is nowhere near bubble territory though.

I agree. We could go up another 50% and only be where it was in the dot com bubble. I'll lighten up if we get there :-)
Title: Re: Does anyone think we are in a bubble?
Post by: PDXTabs on March 09, 2017, 08:11:33 PM
What you're asking basically is, "Should I time the market?"  And the answer is, unequivocally, no.  There is just too much data to process for the average investor.

I mostly agree but, I have index funds that I purchased when the Dow was at 6,500. Now the Dow is at 21,000. I would not be crazy to turn some of those profits into cash for the next market dip.
Title: Re: Does anyone think we are in a bubble?
Post by: Retire-Canada on March 09, 2017, 08:22:35 PM
I mostly agree but, I have index funds that I purchased when the Dow was at 6,500. Now the Dow is at 21,000. I would not be crazy to turn some of those profits into cash for the next market dip.

I would just leave your money invested and not try to time the market. You are likely to lose.
Title: Re: Does anyone think we are in a bubble?
Post by: PDXTabs on March 09, 2017, 08:26:37 PM
I would just leave your money invested and not try to time the market. You are likely to lose.

Well, almost 100% of my net worth was in stocks until last month. Now it's closer to 85%. Time will tell if I was wrong.
Title: Re: Does anyone think we are in a bubble?
Post by: DavidAnnArbor on March 09, 2017, 08:51:33 PM
If we want to be in the stock market we have to embrace the stomach turning volatility of it.
Title: Re: Does anyone think we are in a bubble?
Post by: Roland of Gilead on March 09, 2017, 09:21:21 PM
I thought for sure we were in a bubble back when the DOW was 16,000 or so.

I thought biotech was pretty fairly valued then it dropped 30%.

Time to stop thinking.
Title: Re: Does anyone think we are in a bubble?
Post by: PDXTabs on March 09, 2017, 11:20:12 PM
Time to stop thinking.

It is definitely true that market is not rational. The efficient market hypothesis is, IMHO, rubbish.
Title: Re: Does anyone think we are in a bubble?
Post by: Mola on March 10, 2017, 08:52:14 AM
I don't think we are in a bubble. I do think a recession will probably come around in the current presidential term. I doubt it will be a 2008 recession. Probably just your old 80s/90s style recession where stocks recover in a year or two.
Title: Re: Does anyone think we are in a bubble?
Post by: Scortius on March 10, 2017, 09:42:35 AM
I used to play poker for a living.  We focused so much on making sure that we stayed the course and played our 'A' game while going through a rough stretch and losing hand after hand.  Makes sense, right?

Do you know what was really hard?  Staying the course and playing your 'A' game when everything in the world was going right.  During a heater, it was almost impossible to play with the proper level of aggression and risk while avoiding the feeling of wanting to dial things back to 'lock in' the winnings. 

The catch is that the second mistake is just as bad as the first.  There were days where I'd lose and turn it around.  But, equally as important, there were days where I'd win a huge amount and then continue to win even more.  How did I know what was going to happen?  I didn't, I just had to do my best to stick to my strategy.  You should too.
Title: Re: Does anyone think we are in a bubble?
Post by: Eric on March 10, 2017, 09:56:03 AM
I used to play poker for a living.  We focused so much on making sure that we stayed the course and played our 'A' game while going through a rough stretch and losing hand after hand.  Makes sense, right?

Do you know what was really hard?  Staying the course and playing your 'A' game when everything in the world was going right.  During a heater, it was almost impossible to play with the proper level of aggression and risk while avoiding the feeling of wanting to dial things back to 'lock in' the winnings. 

The catch is that the second mistake is just as bad as the first.  There were days where I'd lose and turn it around.  But, equally as important, there were days where I'd win a huge amount and then continue to win even more.  How did I know what was going to happen?  I didn't, I just had to do my best to stick to my strategy.  You should too.

Excellent analogy!
Title: Re: Does anyone think we are in a bubble?
Post by: ChpBstrd on March 10, 2017, 12:02:17 PM
My question for those who say "keep in the market and don't think about it" is:

What, if any, criteria would cause you to exit the market?

S&P P/E = 40?
Stocks gain 50% in one year?
5 year CAPE = 50?
Price/Sales = 10?
Bond yields of 15%
Open interest in call options exceeds value of entire stock market?
Housing prices reach 40x income?
20% tariffs on all imports?
Door-to-door salesmen offering HELOCs to invest in stocks?
A war between the US and China?

Although buy-n-hold has historically been the winning strategy, it seems like certain identifiable events like these would cause it to necessarily underperform in the near future. Any advice would need to be qualified with "unless this happens".
Title: Re: Does anyone think we are in a bubble?
Post by: frugledoc on March 10, 2017, 12:52:50 PM
My question for those who say "keep in the market and don't think about it" is:

What, if any, criteria would cause you to exit the market?

S&P P/E = 40?
Stocks gain 50% in one year?
5 year CAPE = 50?
Price/Sales = 10?
Bond yields of 15%
Open interest in call options exceeds value of entire stock market?
Housing prices reach 40x income?
20% tariffs on all imports?
Door-to-door salesmen offering HELOCs to invest in stocks?
A war between the US and China?

Although buy-n-hold has historically been the winning strategy, it seems like certain identifiable events like these would cause it to necessarily underperform in the near future. Any advice would need to be qualified with "unless this happens".

None of these things would make me get out.

However, if I was near retirement I might reduce my allocation to equities and go 50:50 and then stay there
Title: Re: Does anyone think we are in a bubble?
Post by: Eric on March 10, 2017, 01:00:37 PM
Although buy-n-hold has historically been the winning strategy, it seems like certain identifiable events like these would cause it to necessarily underperform in the near future. Any advice would need to be qualified with "unless this happens".

Buy and hold will ALWAYS lose to market timing, if (and this is a big if) you actually hit on the timing.  And therein lies the problem.  It's tough to actually get the timing correct once, and nearly impossible over the long term.

Just search through this forum for threads littered with posters from 2013 who are/were sitting on the sidelines in cash because the next crash is imminent.  People suck at this sort of thing, which is why buy and hold is successful.
Title: Re: Does anyone think we are in a bubble?
Post by: dougules on March 10, 2017, 01:03:18 PM
My question for those who say "keep in the market and don't think about it" is:

What, if any, criteria would cause you to exit the market?

S&P P/E = 40?
Stocks gain 50% in one year?
5 year CAPE = 50?
Price/Sales = 10?
Bond yields of 15%
Open interest in call options exceeds value of entire stock market?
Housing prices reach 40x income?
20% tariffs on all imports?
Door-to-door salesmen offering HELOCs to invest in stocks?
A war between the US and China?

Although buy-n-hold has historically been the winning strategy, it seems like certain identifiable events like these would cause it to necessarily underperform in the near future. Any advice would need to be qualified with "unless this happens".

Where would you go after exiting the market?
Title: Re: Does anyone think we are in a bubble?
Post by: Retire-Canada on March 10, 2017, 01:08:41 PM
Marketing timing comments follow a familiar pattern - historically buy and hold worked, but this time it's different because ____________! [fill in the blank]. Thing is people having been telling themselves it's different that whole time, but it has not been different.
Title: Re: Does anyone think we are in a bubble?
Post by: Scortius on March 10, 2017, 01:54:41 PM
My question for those who say "keep in the market and don't think about it" is:

What, if any, criteria would cause you to exit the market?

S&P P/E = 40?
Stocks gain 50% in one year?
5 year CAPE = 50?
Price/Sales = 10?
Bond yields of 15%
Open interest in call options exceeds value of entire stock market?
Housing prices reach 40x income?
20% tariffs on all imports?
Door-to-door salesmen offering HELOCs to invest in stocks?
A war between the US and China?

Although buy-n-hold has historically been the winning strategy, it seems like certain identifiable events like these would cause it to necessarily underperform in the near future. Any advice would need to be qualified with "unless this happens".

I would exit the market only when I planned on accessing my investments for retirement income purposes.  Of those you listed, the only one that stands out at all is the 15% bond yield because that is a pretty darn good guarantee, but that would likely only be true if we were experiencing extreme inflation, in which case expected market returns would likely be even higher.  For all the others, the market will correct itself given a not-too-distant horizon.  The trick to market timing is that you have to hit twice, not just once.  You have to get out at the peak, and you have to get in at the floor.  In practice, even those who do have a good sense of market conditions either sell too early or late and exit too low, and then they buy back too early/late and return at a point equal or higher than they left. 

People look at the 2008 recession as a reference, but that was truly a black swan event, unlikely to be revisited.  It is not a good comparison for what we are likely to see next.  Rather, look at the 2002 crash.  If you sold at the peak, you could have reentered any time up until 2013 and done fine, but, look at the returns leading up to that peak.  It would have been almost impossible to time things that perfectly.  If you left in 1998 when the S&P was at an extreme all-time high, you would have had to buy back at the exact bottom of the following recession just to break even.  That would have been almost an impossible task.

Are we in the same position as the year 2000, or are we at 1998 with 2 more years of high returns still to come before the next drop?  Then, once we do hit a 'correction', how far down will it go?  What if it never drops below where you sold?  Are you willing to take that risk for the chance of a fairly minor gain?
Title: Re: Does anyone think we are in a bubble?
Post by: ChpBstrd on March 10, 2017, 02:41:35 PM
Yes, I get that people suck at market timing, and the right time is never obvious. I accept the "thou shalt not market time" rule and acknowledge you will lose a fortune trading based on Yahoo Finance stories.

What I'm asking is whether there is ANY theoretical limit to that rule. I.e. if the S&P's P/E ratio went from 27 to 100 in six months, would you honestly be unsure or unconcerned about whether an investment bubble had formed?

This is a different question than "what advice would you give a young investor."

Are you saying there was never a time in all history when a market was so expensive that it actually was different? Do bubbles not exist, or are they always invisible?
Title: Re: Does anyone think we are in a bubble?
Post by: Scortius on March 10, 2017, 03:17:33 PM
Yes, I get that people suck at market timing, and the right time is never obvious. I accept the "thou shalt not market time" rule and acknowledge you will lose a fortune trading based on Yahoo Finance stories.

What I'm asking is whether there is ANY theoretical limit to that rule. I.e. if the S&P's P/E ratio went from 27 to 100 in six months, would you honestly be unsure or unconcerned about whether an investment bubble had formed?

This is a different question than "what advice would you give a young investor."

Are you saying there was never a time in all history when a market was so expensive that it actually was different? Do bubbles not exist, or are they always invisible?

I would argue that yes, bubbles can be 'visible' (e.g. most people might agree that we're at some stage of a bubble right now), but that if the end-stage of the bubble was so visible that it could be accurately timed, the price would have already been factored in and therefore the bubble would have burst already.  Thus, by that definition, no bubble can ever be so visible that it can be timed.

Looking back, in retrospect, can you find a time where the answer to your question was true?  Was there a time ever where the bubble was so visible that average people like us could time it appropriately?  It's a real question, I would be interested to hear if there were positive examples.

For example, people tell stories about shoe-shine boys giving stock purchasing advice in 1928, yet I don't recall everyone bailing out of the market then.  Was it visible?  Maybe?  Could it be timed?  That's a much different question when you take off your 'glasses of future perspective'.  The same goes for 2008.  In retrospect it's easy to see the causes.  At the time?  Did you predict it?  From watching Inside Job, it seemed like the number of people who accurately predicted the actual timing and magnitude of the bubble could be measured on two hands (and maybe two feet as well).
Title: Re: Does anyone think we are in a bubble?
Post by: ChpBstrd on March 10, 2017, 08:30:59 PM
Yes, I get that people suck at market timing, and the right time is never obvious. I accept the "thou shalt not market time" rule and acknowledge you will lose a fortune trading based on Yahoo Finance stories.

What I'm asking is whether there is ANY theoretical limit to that rule. I.e. if the S&P's P/E ratio went from 27 to 100 in six months, would you honestly be unsure or unconcerned about whether an investment bubble had formed?

This is a different question than "what advice would you give a young investor."

Are you saying there was never a time in all history when a market was so expensive that it actually was different? Do bubbles not exist, or are they always invisible?

I would argue that yes, bubbles can be 'visible' (e.g. most people might agree that we're at some stage of a bubble right now), but that if the end-stage of the bubble was so visible that it could be accurately timed, the price would have already been factored in and therefore the bubble would have burst already.  Thus, by that definition, no bubble can ever be so visible that it can be timed.

Looking back, in retrospect, can you find a time where the answer to your question was true?  Was there a time ever where the bubble was so visible that average people like us could time it appropriately?  It's a real question, I would be interested to hear if there were positive examples.

For example, people tell stories about shoe-shine boys giving stock purchasing advice in 1928, yet I don't recall everyone bailing out of the market then.  Was it visible?  Maybe?  Could it be timed?  That's a much different question when you take off your 'glasses of future perspective'.  The same goes for 2008.  In retrospect it's easy to see the causes.  At the time?  Did you predict it?  From watching Inside Job, it seemed like the number of people who accurately predicted the actual timing and magnitude of the bubble could be measured on two hands (and maybe two feet as well).

Some bubbles, and their clues, come to mind:
1) Japan stocks and real estate, late 1980s: At one point, land prices in Tokyo hit $219,000 per square meter. Stocks more than tripled between '84 and '89.
2) US stocks, 2000. The tech bubble euphoria and people's astonishment at how much dot-com companies were selling for was unavoidable in the media. Nasdaq's PE was over 100.
3) US real estate, 2005ish-2008: bidding wars, 80% appreciation in some cities within a few years, liar loans, real estate seminars, Trump University
4) Chinese stock micro bubble, March 2, 2015 - April 26, 2015: 29% increase in just two months was the only warning. Still hasn't recovered.

Each of these was accompanied by tons of media coverage and pundits decrying the out-of-whack metrics.

But the question is not whether bubble-identification is a practical or even possible investment strategy. The questions are whether bubbles exist at all and if they are detectable at an actionable time. That is, if you were an investor in these markets at these times, prior to the crashes, did you have information suggesting a bubble?
Title: Re: Does anyone think we are in a bubble?
Post by: DavidAnnArbor on March 10, 2017, 09:13:17 PM
A lot of people who warned of the dotcom bubble were dismissed as pessimistic.

Don't think I can detect a bubble, but I'm hoping that world stock diversification as well as real estate and bonds will prevent my portfolio from being whipsawed by it.
The biggest issue is a bursting stock bubble just as you aspire to quit working.
Title: Re: Does anyone think we are in a bubble?
Post by: Radagast on March 10, 2017, 09:41:17 PM
My question for those who say "keep in the market and don't think about it" is:

What, if any, criteria would cause you to exit the market?

S&P P/E = 40?
Stocks gain 50% in one year?
5 year CAPE = 50?
Price/Sales = 10?
Bond yields of 15%
Open interest in call options exceeds value of entire stock market?
Housing prices reach 40x income?
20% tariffs on all imports?
Door-to-door salesmen offering HELOCs to invest in stocks?
A war between the US and China?

Although buy-n-hold has historically been the winning strategy, it seems like certain identifiable events like these would cause it to necessarily underperform in the near future. Any advice would need to be qualified with "unless this happens".
I doubt I would ever completely exit, but I could see myself moving money to somewhere else in extreme circumstances which I could not say for certain right now what they would be. For bubbles a few signs might be:
1) P/E10 over 35 or 50
2) inverted yield curve for more than a year
3) clear evidence of higher returns elsewhere, for example real bond yields higher than forecast stock returns by both E10/P and dividends+expected growth. Or perhaps for stocks a difference in earning multiples of around a factor of three higher in US vs. international.
It would probably take at least two of those three. The last one is the sanity check, because it makes the difference between "high price" which by itself is meaningless and "better investments elsewhere". I would not ditch a higher returning asset (stocks) for a lower returning one (cash).

War between US and China: no, because by the time you could react knowledgeably the market would be ahead of you. You should double down in this case. If you live and things eventually normalize you will come out far ahead. If you live and your side is crushingly defeated then cash and bonds would be even worse. If you die who cares. Example: Japan after WWII, Germany and France after WWI and WWII.
Title: Re: Does anyone think we are in a bubble?
Post by: gggggg on March 10, 2017, 10:40:39 PM
No one REALLY knows if we're in a bubble. The bulk of my money, in index funds, will drop if the market does; in my trading account I set bracket orders and will be automatically pulled out during drops.
Title: Re: Does anyone think we are in a bubble?
Post by: PizzaSteve on March 10, 2017, 10:45:59 PM
Time to stop thinking.

It is definitely true that market is not rational. The efficient market hypothesis is, IMHO, rubbish.
I suggest those who want to comment on the EMH read up on it and understand what it really mean.  It doenst mean that prices will be stable, correct and that assets will reach their fair price.  Is says that they will reach a price.  Whether or not it turns out to increase or decrease in  value in the future,  as information becomes known, is another thing altogether.   If it is rubbish, what is the foundation for your faith in using markets to exchange investments at a price?  You might want to avoid investing in equities if you truely believe this.
Title: Re: Does anyone think we are in a bubble?
Post by: Mr Mark on March 11, 2017, 04:41:26 AM
This bull could run for years. Right now private equity firms are sitting on $1.47 trillion in cash, and American firms alone have $1.8 trillion.  All that cash will need to go somewhere.
Just keep calm and dca plus drip. You are guaranteed to loose money holding large cash.

If you are risk averse or close to FIRE then have an asset allocation to match. Avoid the temptation to time the market, strong tho that siren call may be. 
Title: Re: Does anyone think we are in a bubble?
Post by: ChpBstrd on March 11, 2017, 07:32:04 AM
Seems like most people are missing the questions. The following are known:

a) Yes, market timing is a losing strategy in general.
b) No, most people cannot identify a bubble, so bubble identification isn't a practical option for most (or any, if you prefer) investors.
c) Yes, media people earn a living calling bubbles that aren't.

The questions are not any of the above, the questions are:

1) Do investment bubbles exist?
2) If you answered that bubbles do exist, what criteria would persuade you that one was occurring? Do you have defined metrics or characteristics that would define a bubble?

It would seem to be a problem if you answered that yes to #1, investment bubbles exist, but no to #2, there are no criteria that defines an investment bubble. It's like saying a thing exists, but you don't know what it is.
Title: Re: Does anyone think we are in a bubble?
Post by: Retire-Canada on March 11, 2017, 07:46:00 AM
Seems like most people are missing the questions. The following are known:

a) Yes, market timing is a losing strategy in general.
b) No, most people cannot identify a bubble, so bubble identification isn't a practical option for most (or any, if you prefer) investors.
c) Yes, media people earn a living calling bubbles that aren't.

The questions are not any of the above, the questions are:

1) Do investment bubbles exist?
2) If you answered that bubbles do exist, what criteria would persuade you that one was occurring? Do you have defined metrics or characteristics that would define a bubble?

It would seem to be a problem if you answered that yes to #1, investment bubbles exist, but no to #2, there are no criteria that defines an investment bubble. It's like saying a thing exists, but you don't know what it is.

If you start off saying "B" that nobody can identify a bubble there is no point asking "2" what metric indicates you are in a bubble.
Title: Re: Does anyone think we are in a bubble?
Post by: Mr Mark on March 11, 2017, 10:32:54 AM
Seems like most people are missing the questions. The following are known:

a) Yes, market timing is a losing strategy in general.
b) No, most people cannot identify a bubble, so bubble identification isn't a practical option for most (or any, if you prefer) investors.
c) Yes, media people earn a living calling bubbles that aren't.

The questions are not any of the above, the questions are:

1) Do investment bubbles exist?
2) If you answered that bubbles do exist, what criteria would persuade you that one was occurring? Do you have defined metrics or characteristics that would define a bubble?

It would seem to be a problem if you answered that yes to #1, investment bubbles exist, but no to #2, there are no criteria that defines an investment bubble. It's like saying a thing exists, but you don't know what it is.

I think it's quite clear asset bubbles can exist. The academic analysis suggests they can only be conclusively identified in most cases after they've popped.

A less academic question is what should you do about it if you think they exist and your spidey senses tell you you're in one? I'm not sure going to cash in 1996 would have been a good call for example.
Title: Re: Does anyone think we are in a bubble?
Post by: ChpBstrd on March 11, 2017, 11:49:20 AM
Seems like most people are missing the questions. The following are known:

a) Yes, market timing is a losing strategy in general.
b) No, most people cannot identify a bubble, so bubble identification isn't a practical option for most (or any, if you prefer) investors.
c) Yes, media people earn a living calling bubbles that aren't.

The questions are not any of the above, the questions are:

1) Do investment bubbles exist?
2) If you answered that bubbles do exist, what criteria would persuade you that one was occurring? Do you have defined metrics or characteristics that would define a bubble?

It would seem to be a problem if you answered that yes to #1, investment bubbles exist, but no to #2, there are no criteria that defines an investment bubble. It's like saying a thing exists, but you don't know what it is.

If you start off saying "B" that nobody can identify a bubble there is no point asking "2" what metric indicates you are in a bubble.
If you can't measure it, it probably does not exist. If there are no possible signals that = bubble, then bubbles don't exist.

Likewise, anything that is claimed to exist must be defined.
Title: Re: Does anyone think we are in a bubble?
Post by: Scortius on March 11, 2017, 04:16:52 PM
Another thing to think about is the greater fool theory.  The bubble may be quite visible, but people won't exit because they don't know when it will actually pop and they want to ride things a bit higher.  In that case, the last ones out get hit and the rest make out 'ok'.  But, once again, the trick is knowing where the drop will go to.  You may end up exiting at a point below the floor of the upcoming drop.  Even if you didn't, you may end up re-entering the market at the wrong point, costing yourself as compared to your results had you simply stayed in.  In this example, there would be an identifiable bubble, but even then it would be very difficult to time profitably.
Title: Re: Does anyone think we are in a bubble?
Post by: Radagast on January 25, 2021, 10:04:03 PM
CAPE 35! According to my completely made up rule of thumb we are in a bubble watch! When thread was young I sort of expected us to get here within a year, but here we are! I bet we can make it all the way to bubble warning though, that would be exciting.
Title: Re: Does anyone think we are in a bubble?
Post by: vand on January 26, 2021, 12:59:00 AM
Grantham says that we have reached euphoria
https://www.youtube.com/watch?v=RYfmRTyl56w
Title: Re: Does anyone think we are in a bubble?
Post by: Retireatee1 on January 26, 2021, 06:16:59 AM
18% return for the S&P500 in 2020?  It's hard to imagine this is mostly organic growth.  So if it is not organic growth, it is either a bubble or it is being propped up.
Title: Re: Does anyone think we are in a bubble?
Post by: vand on January 26, 2021, 06:45:45 AM
18% return for the S&P500 in 2020?  It's hard to imagine this is mostly organic growth.  So if it is not organic growth, it is either a bubble or it is being propped up.

as during dotcom, it's really in the Nasdaq where tech and speculative stocks dominate where the real bubble is forming.

Nasdaq is now stretched further above its 200wma than it has been since dotcom. As with all great trends it can go further, but there will be payback at some point.
Title: Re: Does anyone think we are in a bubble?
Post by: waltworks on January 26, 2021, 07:30:20 AM
Based on all the stock picking threads we're suddenly seeing, I'd say yes.

I mean, that's not actionable for me, so whatever. But I expect some kind of at least decent correction... sometime.

I mean, the thread is from 2017. I bet we don't crash back down to those valuations (ie 35%+/2500) so if OP sold everything, they are doing pretty terribly even without considering dividends.

-W
Title: Re: Does anyone think we are in a bubble?
Post by: GuitarStv on January 26, 2021, 07:38:06 AM
I suspect that we're in a bubble right now.  The key is . . . continue to follow asset allocations and don't pretend you'll be able to successfully time the market.  Same behaviour you should take when you think stocks are undervalued.
Title: Re: Does anyone think we are in a bubble?
Post by: MustacheAndaHalf on January 26, 2021, 07:44:05 AM
18% return for the S&P500 in 2020?  It's hard to imagine this is mostly organic growth.  So if it is not organic growth, it is either a bubble or it is being propped up.
I think that +18% comes from a smaller group of companies than you'd expect.  Apple gained +81% in the past 12 months, ending at 6.7% of the S&P 500.
Here's the full list of big tech, which is 22% of the S&P 500 by weight:
AAPL +81% / AMZN +77% / MSFT +40% / GOOG +30% / FB +28%
Those 5 stocks account for most of the S&P 500 gains in 2020.

CAPE 35! According to my completely made up rule of thumb we are in a bubble watch! When thread was young I sort of expected us to get here within a year, but here we are! I bet we can make it all the way to bubble warning though, that would be exciting.
I think you can make an even stronger case than calling it a made up rule.  A Vanguard research paper from many years ago found a 0.43 correlation between a high 10-year CAPE and lower equity returns going forward.
http://fairwaywealth.com/wp-content/uploads/Vanguard-Research-11-30-2014.pdf#page=7

When you combine that with the 2nd highest CAPE of all time, it's a concern.  But keep in mind a 0.43 correlation is not a guarantee - and you have to ask yourself, what do you invest in, instead?  Lower returning stocks might still beat bonds and cash.
https://www.multpl.com/shiller-pe
Title: Re: Does anyone think we are in a bubble?
Post by: Radagast on January 26, 2021, 09:47:00 PM
CAPE 35! According to my completely made up rule of thumb we are in a bubble watch! When thread was young I sort of expected us to get here within a year, but here we are! I bet we can make it all the way to bubble warning though, that would be exciting.
I think you can make an even stronger case than calling it a made up rule.  A Vanguard research paper from many years ago found a 0.43 correlation between a high 10-year CAPE and lower equity returns going forward.
http://fairwaywealth.com/wp-content/uploads/Vanguard-Research-11-30-2014.pdf#page=7

When you combine that with the 2nd highest CAPE of all time, it's a concern.  But keep in mind a 0.43 correlation is not a guarantee - and you have to ask yourself, what do you invest in, instead?  Lower returning stocks might still beat bonds and cash.
https://www.multpl.com/shiller-pe
That's not what you said in 2017 :D !
I changed from "arbitrary method" to "completely made up rule of thumb" because of your comment!!!
I just made this handy "Radagast's Guide to Bubbles" what I was thinking about posting sometime, now is as good a time as any. It is an arbitrary method ...
An arbitrary method with no track record isn't a good start to providing investing advice.

Anyhow 4 years later and I still like it.
Title: Re: Does anyone think we are in a bubble?
Post by: vand on January 27, 2021, 07:31:05 AM
Based on all the stock picking threads we're suddenly seeing, I'd say yes.

I mean, that's not actionable for me, so whatever. But I expect some kind of at least decent correction... sometime.

I mean, the thread is from 2017. I bet we don't crash back down to those valuations (ie 35%+/2500) so if OP sold everything, they are doing pretty terribly even without considering dividends.

-W

Time will tell.. but I'd wouldn't be surprised if we crashed back down to those levels at some point in the next several years. We've already had one revisit last March.  I think a severe bear market probably takes us right back to around the 2100-2300 level where there is a lot of natural support.

A lot of faith has been placed in the Fed and government institutions that they can keep the market propped up in the event of it going south, but if something happens that ties their hands then that faith may prove misplaced. Inflation or a politically unacceptable weakness in the currency can do that.
Title: Re: Does anyone think we are in a bubble?
Post by: waltworks on January 27, 2021, 07:55:30 AM
February 2017 to now, S&P with dividends reinvested is up 73%. To lose your entire gains we'd need a 45% crash, give or take.

I would not be surprised if that happened. I also wouldn't be surprised if in 2024 we looked back and laughed at this thread because the S&P is up another 100%, either. If you'd asked me in 2017 if I thought US stocks were overvalued I'd have said yes. Good thing I didn't take myself seriously.

Like I said, not actionable so why worry?

-W
Title: Re: Does anyone think we are in a bubble?
Post by: vand on January 27, 2021, 08:18:56 AM
February 2017 to now, S&P with dividends reinvested is up 73%. To lose your entire gains we'd need a 45% crash, give or take.

I would not be surprised if that happened. I also wouldn't be surprised if in 2024 we looked back and laughed at this thread because the S&P is up another 100%, either. If you'd asked me in 2017 if I thought US stocks were overvalued I'd have said yes. Good thing I didn't take myself seriously.

Like I said, not actionable so why worry?

-W

You wouldn't be surprised if the market went to a valuation that it has never reached before?

I mean, I suppose its possible... anything is possible. But in the range of outcomes this sits so many standard deviations above the expected midpoint that it's just a doolaly throwaway figure of speech.Yes, it can happen. Little green martians landing can also happen...but it would definitely be a "surprise".   

By contrast a 45% crash occurs every decade or so. Hell I remember the last 2.

And I don't agree that it's not actionable. The extension is that you should be fully invested all of the time. Investing is not about black and white decisions. There are many shares of grey.. investing is the art of balancing risk with expected reward.
Title: Re: Does anyone think we are in a bubble?
Post by: waltworks on January 27, 2021, 08:24:33 AM
Ok, going to go to cash? Short? What actions are you personally taking? Why didn't you do any of that stuff in 2017 when the market was also overvalued?

-W
Title: Re: Does anyone think we are in a bubble?
Post by: vand on January 27, 2021, 08:40:55 AM
Ok, going to go to cash? Short? What actions are you personally taking? Why didn't you do any of that stuff in 2017 when the market was also overvalued?

-W

sure. You can divert to cash, treasuries, t-bills, gold, TIPS, international equities, emerging markets equities, emerging market bonds, REITs, commodities, private equity. or fine wines. or art.

Or you could keep all your eggs in one basket and continue to view the world in monochrome.
Title: Re: Does anyone think we are in a bubble?
Post by: waltworks on January 27, 2021, 08:42:59 AM
No, no - did you do that stuff 3 years ago? If not, why not?

Again, we're in agreement that things are super overvalued. But unless you've successfully acted on that in the past, why would you assume you can now? I've invested through several big downturns and doing nothing always worked out pretty well in the long run, which is all I care about.

For what it's worth, I've not bought any US stocks in at least 6 months now, because to keep my international/US balance where I decided it should be, I'm just buying non-US. So if that counts as actively doing something, I suppose I am, but it's a purely AA driven decision.

-W
Title: Re: Does anyone think we are in a bubble?
Post by: ChpBstrd on January 27, 2021, 08:43:31 AM
18% return for the S&P500 in 2020?  It's hard to imagine this is mostly organic growth.  So if it is not organic growth, it is either a bubble or it is being propped up.
I think that +18% comes from a smaller group of companies than you'd expect.  Apple gained +81% in the past 12 months, ending at 6.7% of the S&P 500.
Here's the full list of big tech, which is 22% of the S&P 500 by weight:
AAPL +81% / AMZN +77% / MSFT +40% / GOOG +30% / FB +28%
Those 5 stocks account for most of the S&P 500 gains in 2020.

CAPE 35! According to my completely made up rule of thumb we are in a bubble watch! When thread was young I sort of expected us to get here within a year, but here we are! I bet we can make it all the way to bubble warning though, that would be exciting.
I think you can make an even stronger case than calling it a made up rule.  A Vanguard research paper from many years ago found a 0.43 correlation between a high 10-year CAPE and lower equity returns going forward.
http://fairwaywealth.com/wp-content/uploads/Vanguard-Research-11-30-2014.pdf#page=7

When you combine that with the 2nd highest CAPE of all time, it's a concern.  But keep in mind a 0.43 correlation is not a guarantee - and you have to ask yourself, what do you invest in, instead?  Lower returning stocks might still beat bonds and cash.
https://www.multpl.com/shiller-pe

My takeaway from the vanguard study was that they found zero instances of 10 year returns over 5% when CAPE was greater than 30, and an equal number of slightly positive and slightly negative returns. Regardless of how low the coefficient of determination is, this result stands out. We should expect somewhere around 0% returns for the next 10 years.

What to invest in instead?

-I have several preferreds yielding ~6%
-Non-bubble real estate can yield about a 6% return on cash that grows with inflation.
-Sell OTM put options, exposing only a small portion of your portfolio at any given time.
-Calls and cash
-Bear spreads
-One’s mortgage
-Foreign assets with better valuations, although these are becoming scarce
Title: Re: Does anyone think we are in a bubble?
Post by: vand on January 28, 2021, 04:51:58 AM
No, no - did you do that stuff 3 years ago? If not, why not?

Again, we're in agreement that things are super overvalued. But unless you've successfully acted on that in the past, why would you assume you can now? I've invested through several big downturns and doing nothing always worked out pretty well in the long run, which is all I care about.

For what it's worth, I've not bought any US stocks in at least 6 months now, because to keep my international/US balance where I decided it should be, I'm just buying non-US. So if that counts as actively doing something, I suppose I am, but it's a purely AA driven decision.

-W

Buying non-US definitely counts as an "doing something".
Personally I cut down my equities exposure from around 60% down to 45% since the market started its meltup since the vaccine announcements, and most of that is in non-US, with spread the rest around in other asset classes. That's my version of doing something.
Title: Re: Does anyone think we are in a bubble?
Post by: blue_green_sparks on January 28, 2021, 06:02:47 AM
What to invest in instead?
If I was 20 years younger and still working I would do nothing. With a NW ~$2M, my risk tolerance is much lower being in between career income and entitlement income. I picked up several brokered CDs when they were 3.25% and some of those dreaded immediate annuities as well. Some preferred stocks, some dividend stocks and some defined outcome index ETFs. Use 'MINT' to hold some cash. Bought a rental property as well. I have less than 10% allocation into the total stock fund. Barring some huge inflation pressure we can draw -1 to +1 % and live comfortably. This low interest era makes it rough for savers. On a daily basis, I fight with my risker self and the "Fear Of Missing Out".
Title: Re: Does anyone think we are in a bubble?
Post by: tooqk4u22 on January 28, 2021, 06:03:23 AM
Ok, going to go to cash? Short? What actions are you personally taking? Why didn't you do any of that stuff in 2017 when the market was also overvalued?

-W

Definitely don't go short given what's going on with short squeezes lately!
Title: Re: Does anyone think we are in a bubble?
Post by: Accrual on January 28, 2021, 06:05:32 AM
Yes. I think we are in a bubble. Stimulus has inflated equities in the short-term. Once people realize there is no basis for these valuations, there will be a sell-off and inflation will transfer from equities into cash.
Title: Re: Does anyone think we are in a bubble?
Post by: tooqk4u22 on January 28, 2021, 06:24:10 AM
Yes. I think we are in a bubble. Stimulus has inflated equities in the short-term. Once people realize there is no basis for these valuations, there will be a sell-off and inflation will transfer from equities into cash.

Stimulus and fed policy has inflated everything and they reaffirm that still no end in sight.   Fed is irresponsible.    Even if one thinks inflation isn't coming back and that big deficit/debt load is no big deal because rates are low, know that the majority of US Debt is short term (not the 10 and 30 year thats available).   That's why the US Debt levels exploded last year but interest costs actually went down a bit - so think about the inverse of that when/if rates rise.  Big additions to the federal budget. 

Not to mention modern monetary policy doesn't work like it used to because we are a services society and not a manufacturing one.   The fed is directly, not entirely, responsible for inequality.   
Title: Re: Does anyone think we are in a bubble?
Post by: ChpBstrd on January 28, 2021, 09:10:15 AM
This is a tough bubble. Back in 1999 one could definitely say "there is a bubble in tech stocks, so I'm going to rotate to bonds (yielding 7-8%) for the next few years." Now, the bubble is in bonds, entire stock indices, PM's, preferreds, coastal real estate, etc. The obvious signs of froth are forming among widely-shorted stocks, tech, etc. and in the rationales people give for paying these prices, like FOMO, TINA, and the perennial "this time is different so valuation doesn't matter". There are few places to re-allocate to, and there have been only a handful of periods since 1926 where valuations were anywhere near this high and the returns were positive a decade later - with several periods of negative 10y returns.

I'll be looking into a more defensive plan, such as selling risk-offsetting condors on the SPY and the VIX, local LCOL real estate, holding cash and call options, or simply selling way-low puts to eek by and try to earn 4-7% a year. These niches, with very careful risk management, may be key to retiring and staying retired for the next decade.
Title: Re: Does anyone think we are in a bubble?
Post by: chasesfish on January 30, 2021, 10:20:20 AM
Valuations are lofty.  They've been lofty and got worse.  I have no idea when / how they will come down and if I'll even be alive for them coming down.   I think the real estate market has been the best example of many people throwing their hands up and saying "f-it", I can't wait forever to buy my home.

A healthy allocation in treasury bonds, emerging markets, and value stocks are the best thing I can find for portfolio protection, but it's also created lagging returns and the need to battle FOMO.

Developing multiple sources for small consulting jobs is the best protection I have in case I have to wait out a portfolio melt down.
Title: Re: Does anyone think we are in a bubble?
Post by: MustacheAndaHalf on January 30, 2021, 05:13:23 PM
CAPE 35! According to my completely made up rule of thumb we are in a bubble watch! When thread was young I sort of expected us to get here within a year, but here we are! I bet we can make it all the way to bubble warning though, that would be exciting.
I think you can make an even stronger case than calling it a made up rule.  A Vanguard research paper from many years ago found a 0.43 correlation between a high 10-year CAPE and lower equity returns going forward.
http://fairwaywealth.com/wp-content/uploads/Vanguard-Research-11-30-2014.pdf#page=7

When you combine that with the 2nd highest CAPE of all time, it's a concern.  But keep in mind a 0.43 correlation is not a guarantee - and you have to ask yourself, what do you invest in, instead?  Lower returning stocks might still beat bonds and cash.
https://www.multpl.com/shiller-pe
That's not what you said in 2017 :D !
I changed from "arbitrary method" to "completely made up rule of thumb" because of your comment!!!
I just made this handy "Radagast's Guide to Bubbles" what I was thinking about posting sometime, now is as good a time as any. It is an arbitrary method ...
An arbitrary method with no track record isn't a good start to providing investing advice.
Anyhow 4 years later and I still like it.
An arbitrary rule means there's no data.  With a 0.43 correlation, there's data so it's not an arbitrary rule.  For an investment approach, I hope most investors use something much stronger than a 0.43 correlation.  Isn't that going to be wrong more than half the time?

ChpBstrd - I read some articles by Larry Swedroe explaining why today's CAPE is dramatically different from historical CAPE.  The rules for reporting earnings are very different, which makes it harder to compare to the past.  That said, that 0% average and 5% top earnings for current CAPE level is interesting to think about.

CAPE was co-created by Robert Schiller, who weighed in on it in December:
“The level of interest rates is an increasingly important element to consider when valuing equities,” writes Shiller.  The ECY indicator (inverse CAPE) “confirms the relative attractiveness of equities, particularly given a potentially protracted period of low interest rates.” 
https://www.thinkadvisor.com/2020/12/01/stocks-prices-not-as-absurd-as-some-think-shiller/
Title: Re: Does anyone think we are in a bubble?
Post by: waltworks on January 30, 2021, 07:05:28 PM
An arbitrary rule means there's no data.  With a 0.43 correlation, there's data so it's not an arbitrary rule.  For an investment approach, I hope most investors use something much stronger than a 0.43 correlation.  Isn't that going to be wrong more than half the time?

Um, no. It means that you can attribute 43% of the variation in thing X to what thing Y is doing (ie, 43% of the change in 10 year returns can be explained by the CAPE, using past data). This assumes you don't want to get into the Bayesian weeds, and the dataset has some problems, but there's not a "wrong" involved here. The future is not predictable, but if it follows the basic pattern of the past, we'd expect lower 10 yr returns with higher CAPE, with a pretty strong relationship, but far from perfect.

-W
Title: Re: Does anyone think we are in a bubble?
Post by: ChpBstrd on January 31, 2021, 09:23:02 PM
ChpBstrd - I read some articles by Larry Swedroe explaining why today's CAPE is dramatically different from historical CAPE.  The rules for reporting earnings are very different, which makes it harder to compare to the past.  That said, that 0% average and 5% top earnings for current CAPE level is interesting to think about.

CAPE was co-created by Robert Schiller, who weighed in on it in December:
“The level of interest rates is an increasingly important element to consider when valuing equities,” writes Shiller.  The ECY indicator (inverse CAPE) “confirms the relative attractiveness of equities, particularly given a potentially protracted period of low interest rates.” 
https://www.thinkadvisor.com/2020/12/01/stocks-prices-not-as-absurd-as-some-think-shiller/

@MustacheAndaHalf you've dug up some very good literature lately, so maybe you can refer me on a few questions. I tried googling Swedroe and CAPE and remain unsatisfied:
 
1) Exactly how much of a difference did the change in how GAAP accounts for goodwill and other intangibles affect earnings? Did companies really abuse the rules to cut their earnings 2%? 10%? 50%? PE ratios have doubled, so what percentage of that is changes in GAAP?

2) If paying dividends was so devastating to investor returns, why did companies pay such high dividends in the past? How did nobody for nearly a hundred years figure out that their firms would be more valuable if they just cut the dividend and invested in growth? Seems like if it was that simple, and low-payout-ratio = higher valuation, an activist investor could buy into a dividend paying company, force them to cut the dividend and reinvest proceeds, and sell out for huge profits. Why didn't that happen all the time from 1880-1980?

3) Yes, there was less liquidity in the late 1800s and early 20th century, but it is not clear why this would change investors' required rate of return. If TINA applies as an explanation for why today's investors are willing to accept low rates of return, then why wouldn't it apply as an explanation for why past investors were willing to accept low liquidity and high transaction costs? In either case, the alternative was not investing and in either case the cost was tangible. (this is actually a critique of the TINA rationale, I understand the deadweight losses caused by economic friction).
Title: Re: Does anyone think we are in a bubble?
Post by: ChpBstrd on January 31, 2021, 09:50:40 PM
In 2016 when CAPE was about 25, Swedroe suggested the following adjustments to make it comparable to previous years:

1) Add 4 full points for accounting changes.
2) Add 1 full point for lower dividend payout.
3) Assume the equity risk premium is lower due to liquidity, transaction costs, etc. (exact adjustment undefined)

This, he said, brought the CAPE closer to its average in recent decades of around 20.

I wonder what he's saying now that CAPE is 35 instead of 25? Would he say we are 40-50% overvalued, per his 2016 formula?

https://buckinghamadvisor.com/cape-10-signaling-the-market-is-vastly-overvalued/ (https://buckinghamadvisor.com/cape-10-signaling-the-market-is-vastly-overvalued/)
Title: Re: Does anyone think we are in a bubble?
Post by: MustacheAndaHalf on February 01, 2021, 03:00:43 AM
An arbitrary rule means there's no data.  With a 0.43 correlation, there's data so it's not an arbitrary rule.  For an investment approach, I hope most investors use something much stronger than a 0.43 correlation.  Isn't that going to be wrong more than half the time?
Um, no. It means that you can attribute 43% of the variation in thing X to what thing Y is doing (ie, 43% of the change in 10 year returns can be explained by the CAPE, using past data). This assumes you don't want to get into the Bayesian weeds, and the dataset has some problems, but there's not a "wrong" involved here. The future is not predictable, but if it follows the basic pattern of the past, we'd expect lower 10 yr returns with higher CAPE, with a pretty strong relationship, but far from perfect.
I think that correlation refers to returns 10-20 years in the future.  I'm not aware of that being used to produce superior returns - but if it's an information advantage, it should provide a way to beat the market.  The only study I recall, which varied asset allocation by CAPE, did not beat buy & hold.  I think Swedroe mentioned it in one of his articles years ago, when discussing CAPE.

Robert Schiller, the co-creator of CAPE, has repeatedly said not to invest based on it.  I interpret his view as saying you learn something about the investment environment from CAPE - but it's not an all-in or all-out indicator.  In my view, it is not strong enough to base investment decisions on, and I think the co-creator of CAPE agrees with that.
Title: Re: Does anyone think we are in a bubble?
Post by: MustacheAndaHalf on February 01, 2021, 03:14:15 AM
@ChpBstrd - Bad news, your knowledge of CAPE and Swedroe passed mine - I can see you've read up from the information and questions, but I haven't kept up with Swedroe for awhile.  I don't recall those 4+1 adjustments to CAPE, for example.

Many years ago, I got annoyed at investors (partly here, partly elsewhere) who chased returns.  I used what I learned from Swedroe, that momentum has the highest return with the most consistency, and tilted towards that.  But as I've drifted away from small cap value tilts, I've spent less time keeping up with Mr Swedroe.

I think a large number of investors used to count on the dividend (retirees especially).  Maybe Amazon was the most successful champion of reinvesting in the company, instead of paying a dividend.  I don't know what changed, but now it's more common to avoid the tax impact of dividends - instead the company buys back it's own stock.

You could also read what Robert Schiller has to say about CAPE.  His recent article seems to suggest you invert the CAPE to get the yield.  So inverting 33.8 CAPE gives you 0.0296% yield, call that 3% yield.  Maybe that's a rough prediction of future returns, driven by earnings?  More importantly, that 3% beats the current 1% interest rate offered by bonds, so it might still be appealing.
Title: Re: Does anyone think we are in a bubble?
Post by: RWD on February 01, 2021, 07:15:16 AM
You could also read what Robert Schiller has to say about CAPE.  His recent article seems to suggest you invert the CAPE to get the yield.  So inverting 33.8 CAPE gives you 0.0296% yield, call that 3% yield.  Maybe that's a rough prediction of future returns, driven by earnings?  More importantly, that 3% beats the current 1% interest rate offered by bonds, so it might still be appealing.
This makes intuitive sense to me and is essentially what I am using for future return estimates. Though I think it general it must be either conservative or perhaps real returns because if you invert the historical median CAPE (15.8) you only get 6.3% instead of the 9-10% that the S&P 500 has actually returned.
Title: Re: Does anyone think we are in a bubble?
Post by: ChpBstrd on February 01, 2021, 09:50:00 AM
@ChpBstrd - Bad news, your knowledge of CAPE and Swedroe passed mine - I can see you've read up from the information and questions, but I haven't kept up with Swedroe for awhile.  I don't recall those 4+1 adjustments to CAPE, for example.

Many years ago, I got annoyed at investors (partly here, partly elsewhere) who chased returns.  I used what I learned from Swedroe, that momentum has the highest return with the most consistency, and tilted towards that.  But as I've drifted away from small cap value tilts, I've spent less time keeping up with Mr Swedroe.

I think a large number of investors used to count on the dividend (retirees especially).  Maybe Amazon was the most successful champion of reinvesting in the company, instead of paying a dividend.  I don't know what changed, but now it's more common to avoid the tax impact of dividends - instead the company buys back it's own stock.

You could also read what Robert Schiller has to say about CAPE.  His recent article seems to suggest you invert the CAPE to get the yield.  So inverting 33.8 CAPE gives you 0.0296% yield, call that 3% yield.  Maybe that's a rough prediction of future returns, driven by earnings?  More importantly, that 3% beats the current 1% interest rate offered by bonds, so it might still be appealing.

Some say dividends went out of style after Ronald Reagan (!) made them fully taxable. Given the choice between being double-taxed and doing buybacks, you know what happened. The minor miracle is that it took so long. 

https://www.suredividend.com/dividend-taxation/ (https://www.suredividend.com/dividend-taxation/)

I agree with Shiller inverting the CAPE is a rational way to forecast whether one's portfolio can support one's WR in perpetuity. It's the same as if one owned a laundromat or rental properties. One should also forecast about 2.6% earnings growth per year, the average since about 1980. If one has a $50k withdraw rate, expects inflation to be equal or less than the 2.6% long-term earnings growth rate, and the CAPE is 35, then one needs a (35 x 50,000 =) $1.75M portfolio. If a 2.9% WR seems ahistorical, bear in mind that the Trinity study was done on a time period when CAPE was closer to 17 (a CAPE yield of 5.9%, growing at 3.5%/year) and it only required not going broke after 30 years.

Maybe as you alluded to the market is forecasting long term corporate earnings growth to significantly exceed long term inflation. This growth function would reduce the failure rate and get the SWR closer to I'm guessing 3.5% (too lazy to enter into a simulator). 

An example of buying too high: buying the dip in Japanese stocks in the mid-1990s when their CAPE was still above 40. Corporate earnings went straight up from there, but investors were still overpaying, even on a "consolidated" basis where CAPE was closer to 30. Only a CAPE analysis could have warned investors their retirements were unsafe.

Japan CAPE history: https://siblisresearch.com/data/japan-shiller-pe-cape/ (https://siblisresearch.com/data/japan-shiller-pe-cape/)
Japen Corporate Earnings growth: https://tradingeconomics.com/japan/corporate-profits  (https://tradingeconomics.com/japan/corporate-profits)