Investing When Everything Seems Expensive

Posted on November 20, 2013 at 10:36 AM PST by

If you read the popular investing news sites, the “rah-rah” headlines can give you pause. Investing when everything seems overpriced is a challenge.

This is where experienced investors start reaching for data to make investing feel okay. A popular number for this purpose is the price-to-earnings (P/E) ratio.

Since stocks trade at very different prices, one way to compare them apples-to-apples is to look at how much you pay for their earnings, the money the company generates. That’s the P/E ratio.

investing

The P/E for the S&P 500 Index at this writing is 19.71. Compare that number to the median of 14.51 and you might conclude that stocks are expensive, but not exorbitantly so.

To be a little more sure, you could look at the Shiller P/E (named for Yale professor Robert Shiller, pictured), which averages a decade’s earnings rather than the trailing 12 months.

That number is at 25.42 vs. a median of 15.9. Now stocks seem a bit more expensive, yes, but not anywhere near the 1999 high of 44.2 on the Shiller scale.

(Remember, that year was the height of the dot-com bubble, when companies with essentially zero earnings were trading through the roof. The Shiller minimum is 4.78, set in December 1920.)

Now that we’ve informed ourselves, remember what “a little bit of knowledge” really does for us. Information is soothing in its own way, but it’s hardly a substitute for prudent retirement investing.

There are hundreds of data points you might consider in making (or not making) an investment. If you wanted a reason to take action, you will not lack for one.

Instead, consider the simple basketball paradigm: You miss 100% of shots you don’t take.

Put in investing terms, one should not time the market but spend time in the market. Every day you sit in cash its value erodes, steadily, due to inflation. Time is money, as usual.

Investing simply

That’s not to say “go buy stocks.” Far from it. But do buy investments. Prudent investors stay invested, even when markets seem to be peaking, by holding a balanced portfolio that includes stocks, bonds, real estate and commodities.

It might turn out to have been a “pricey” moment to get in. But unless your time horizon is less than a year, the cost and risk of “waiting it out” are enormous in comparison.

A year passes, then two. Market rise and fall but never convincingly “bottom” in your mind. So you stay out and wait for the right moment to get in cheaply. And it never comes.

Meanwhile, a balanced portfolio would see gains now, collect dividends and interest payments between, and sell off incrementally as it mattered, by rebalancing. Rather than waiting for the right moment, it’s always the right moment.

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