Is the market still inflated?

[Tangler]

Are you planning to retire at 70 or is that just when you will start drawing from your stock market funds? I go back and forth trying to decide if my time frame is 8 years, when I'm 65 and plan to retire, or longer. I could live on my other investments for a few years without having to touch the stock market funds if needed.

It is a good question.

Short answer: 70 is when I plan on needing funds from stock index funds.

72ish.

Drawdown will have a bunch of variables determining when, what, how, and how much.

Plan on "retiring" in the next 1- 5 years. Therefore I will be 50-55.

Currently 49.

My stock funds are for at least 15 years from now.

I plan on building a cash bucket = short term taxable bucket + Stock bucket.

The cash bucket will contain 3-5 years worth of living expenses (roughly 300-500) and I will use it to live and pay for emergencies (EF).

This cash bucket should help with SORR.

Since the cash bucket exists there is no reason to ever do the foolish panic sell disaster move (which would effectively lock in SORR badness).

Therefore the stock index funds that I buy now (and avoid selling now) are for the long run.

If / when we get the next bull market I can consider selling some stocks to fund Roth conversions prior to 72 or to replenish the cash bucket (should it be depleted).

[The White Coat Investor]

I was certain there would be a crash in 2020 that never came

Did you miss March 2020?

[afan]

I think the market is still high by traditional valuation methods. However, I do not believe that valuations give signals that can be used to time the market. So I do not act on my belief that it is overvalued

If it keeps going down, I will revise upwards my long term estimated expected returns.

My asset allocation has not changed much. At least I don't think so. I check for allocation in late Dec and late June, so I do not know how the markets have changed my allocation since Dec '21. Come late June, I will rebalance if the allocation is outside my wide bands.

There are many comments on whether one should use the long term mean PE or Shiller PE or whether it should be adjusted due to changes in accounting rules and behavior of investors. Interesting to read about but does not affect my investing

[StateOfMyHead]

Did you miss March 2020?

Perhaps I blinked. To me that was a brief plunge before the market climbed to the stratosphere for what reasons I will never understand.

[Tim]

What else are you considering?
This is really a capital allocation question.
Choose the “best of the best” or the “best of the worst”.

If it is overvalued, what is a better risk adjusted return. Or for that matter, a smaller loss?

The answer to your question does not produce any actionable advice.

[MPMD]

not trying to be nasty but i truly don't understand this question.

when i graduated HS the dow was at 9k
when obama began second term the dow was at 13k
when trump was inaugurated the dow was at 19k

at some point before i retire i fully expect the dow to be at 60k if not higher
optimism basically always wins in the long term

asking whether the market is overvalued or inflated is a purely philosophical question. you could find a hyper-intelligent person from literally every day in the history of investing to tell you now is the time to get out or prepare for the big bear. statistically they have all been wrong.

[Tangler]

not trying to be nasty but i truly don't understand this question.

when i graduated HS the dow was at 9k
when obama began second term the dow was at 13k
when trump was inaugurated the dow was at 19k

at some point before i retire i fully expect the dow to be at 60k if not higher
optimism basically always wins in the long term

asking whether the market is overvalued or inflated is a purely philosophical question. you could find a hyper-intelligent person from literally every day in the history of investing to tell you now is the time to get out or prepare for the big bear. statistically they have all been wrong.

You said it well.
Over the long run it goes up.
If your time horizon is long, relax.
Focus elsewhere.

[Turf Doc]

I have never understood how someone can decide that a market is or is not "inflated". Why should we assume that there's some "reasonable" P/E ratio (usually what i hear about) and, like a law of nature, it must come back down to that to be "fairly" priced. Just because something was one way in the past doesn't mean that was normal or that we will ever go back to that.

Isn't something worth what someone will pay for it?

[CM]

I was certain there would be a crash in 2020 that never came and while I think there is a buying opportunity now I have to wonder if the market is still inflated? The Dow, NASDAQ and S&P are all higher than they were fall of 2019 at which time I thought we were due for a bit of a cooling off. What do you think?

Rather than ask if the stock mkt is "inflated" it's probably more useful to ask if long-term returns will be better, worse, or similar to historical returns. The answer to that question is, "Worse," for both stocks and bonds. The solution to that problem (with a given income) is to plan to save more and/or work longer.

I'm in the camp that believes foreign stocks offer better LT returns, and they are 100% of my equity allocation. However, I don't expect more than 6% real overseas either.

I won't be surprised by a 10-20 year bear market; the sort we've experienced multiple times in the past from even lesser valuation levels.

[Turf Doc]

Rather than ask if the stock mkt is "inflated" it's probably more useful to ask if long-term returns will be better, worse, or similar to historical returns. The answer to that question is, "Worse," for both stocks and bonds. The solution to that problem (with a given income) is to plan to save more and/or work longer.

I'm in the camp that believes foreign stocks offer better LT returns, and they are 100% of my equity allocation. However, I don't expect more than 6% real overseas either.

I won't be surprised by a 10-20 year bear market; the sort we've experienced multiple times in the past from even lesser valuation levels.

But it's also completely possible long-term returns will be even better than in the past, and as a result the whole ~11% return of the US stock market that we usually cite will actually be bumped up for future generations in estimating future returns, right? Of course if we assume that the stock market returns 11% and we had a decade+ of significantly more than that, you would need further decade(s) of lower to make up for it, but that assumes that the average *must* be what it was in the past, right? If so, i don't understand how we can make that assumption, given that no one has basically ever been able to predict stock returns.

[CM]

But it's also completely possible long-term returns will be even better than in the past, and as a result the whole ~11% return of the US stock market that we usually cite will actually be bumped up for future generations in estimating future returns, right? Of course if we assume that the stock market returns 11% and we had a decade+ of significantly more than that, you would need further decade(s) of lower to make up for it, but that assumes that the average *must* be what it was in the past, right? If so, i don't understand how we can make that assumption, given that no one has basically ever been able to predict stock returns.

The market return isn't magic, it's arithmetic. It's dividend payout plus growth adjusted for the change in multiple over the horizon of interest.

Payouts (yields) are low relative to history. If one adds historical growth rates to current payouts, one arrives at a low estimate for future returns. Given that current multiples are around the historical 95th percentile, I'll go out on a limb and project lower LT future multiples rather than higher. That's then a haircut to returns.

You're free to project higher real growth in the future than in the past, but then you aren't relying on history, you are relying on the future being much better than the past.

[Turf Doc]

The market return isn't magic, it's arithmetic. It's dividend payout plus growth adjusted for the change in multiple over the horizon of interest.

Payouts (yields) are low relative to history. If one adds historical growth rates to current payouts, one arrives at a low estimate for future returns. Given that current multiples are around the historical 95th percentile, I'll go out on a limb and project lower LT future multiples rather than higher. That's then a haircut to returns.

You're free to project higher real growth in the future than in the past, but then you aren't relying on history, you are relying on the future being much better than the past.

i don't necessarily have an opinion one way or the other on returns, but i totally agree that if you expect higher growth and even continued higher returns that means that the future has been better than the past.

I guess I just don't necessarily understand why multiples cant continue to go up as they have been for the last few decades. I feel like most people who are confident about low, sometimes very low, future returns, generally rely on reversion to the mean re: multiples as a large justification. But I dont think anyone has been able to actually predict returns using these multiples because the 95th percentile keeps going up, and what looked extremely expensive back then is actually cheap now, and the good returns since then don't count because *now* the multiple looks "reasonable".

[CM]

i don't necessarily have an opinion one way or the other on returns, but i totally agree that if you expect higher growth and even continued higher returns that means that the future has been better than the past.

I guess I just don't necessarily understand why multiples cant continue to go up as they have been for the last few decades. I feel like most people who are confident about low, sometimes very low, future returns, generally rely on reversion to the mean re: multiples as a large justification. But I dont think anyone has been able to actually predict returns using these multiples because the 95th percentile keeps going up, and what looked extremely expensive back then is actually cheap now, and the good returns since then don't count because *now* the multiple looks "reasonable".

The "intrinsic" return to stocks is made of the payout and growth. The higher the multiple the lower the future return, for any given payout and growth figures. Holding all else equal, an investor who buys at a low multiple and sells at a high multiple will benefit, but the new holder will have to accept a lower prospective return -- unless he is lucky enough to find a greater fool in the future.

The average PE10 for the month of June, 1982 was about 6.64. http://www.econ.yale.edu/~shiller/data.htm
It was low in large part due to the 10-year treasury yield at 14.3%. http://www.fedprimerate.com/10-Year-...ld-History.htm

The PE10 rose substantially since then, largely because interest rates have been falling. It's about 31.4 now:

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

The 10-year yield is now about 2.9%. https://www.wsj.com/market-data/bond...top_subsection
The PE10 was recently even higher when rates were even lower.

Interest rates have been lower in recent years than ever in recorded history, i.e., centuries of records. I think it's reasonable to think we plumbed the bottom. If rates rise, equity multiples will fall.

[StateOfMyHead]

I have never understood how someone can decide that a market is or is not "inflated". Why should we assume that there's some "reasonable" P/E ratio (usually what i hear about) and, like a law of nature, it must come back down to that to be "fairly" priced. Just because something was one way in the past doesn't mean that was normal or that we will ever go back to that.

Isn't something worth what someone will pay for it?

You make good points and I agree that prices are what someone is willing to pay but the what someone is willing to pay changes particularly in the housing and stock markets. Long term I think it is very reasonable to count on them continuing to rise but that can take decades and there are generally discounts to be had in between. There were times in the past in my opinion when it was fairly obvious that things were over inflated such as the .com and housing bubbles. Not that I expect anyone to have the crystal ball just mulling it over.

[burritos]

Did people in Japan think their market was inflated in the 80's and how has the persistent Japan(if there are any) DCA'ers been fared since.